Asymmetric Tourism Demand Responses to Exchange Rate Fluctuations in South Korea

Abstract

Since perfectly reversible demand functions are generally used in tourism demand modeling, little attention has been given to the asymmetric tourist responses to exchange rate changes. This article attempts to fill this gap by examining two types of the asymmetric demand responses associated with exchange rate fluctuations: 1) currency appreciations and depreciations and 2) rises and falls in exchange rate volatility. Using the linear and nonlinear ARDL models, this study finds evidence of the asymmetrical pattern of long-run adjustment with respect to currency value and exchange rate volatility changes. In the majority of cases, tourists are sensitive to exchange rate changes when the Korean won appreciates, but they are insensitive when the Korean won depreciates, suggesting that foreign visitors in South Korea are loss averse. Furthermore, increases and decreases in exchange rate volatility tend to affect Korea's inbound tourism demand in an asymmetric manner. These findings imply that the assumption of perfectly reversible tourism demand responses to exchange rate changes can be restrictive.