Forecasting International Tourism with Due Regard to Asymmetric Income Effects

Abstract

This study looks into ways of estimating tourism demand models while accounting for asymmetric income effects on demand across business cycles and using the estimated equations to forecast until 2015. Expenditure for outbound travel (tourism imports) in five source markets are analysed using econometric models that can capture varying magnitudes of price and income effects depending on the phase of the business cycle. The main reasons why income elasticities may vary across the business cycles are loss aversion, liquidity constraints and precautionary saving, as well as the intensity and time structure of substitution effects between expenditures on tourism imports, domestic tourism and other goods and services. The forecasting results clearly demonstrate that forecasting errors can be reduced by using the suggested approach, which considers possible asymmetric income effects, instead of the mainstream approach applied in most tourism demand studies, which is based on the assumption of constant elasticities across the business cycles.