IMPACT OF EXCHANGE RATE ON FOREIGN TOURIST DEMAND: EVIDENCE FROM DEVELOPING COUNTRIES

Abstract

The tourism sector plays a critical role in many countries worldwide. The purpose of this study is to explore the impact of the exchange rate on foreign tourist demand in 47 developing countries from 2005 to 2020. Unlike previous studies, our empirical data only includes low-income and low-middle-income countries for the quantitative research process. The Driscoll-Kraay standard errors method has been applied for the estimation. The result confirms that an increase in exchange rate leads to a higher number of international tourism arrivals in these countries. Therefore, if policymakers in these countries depreciate the value of their domestic currency, it will create a boosting effect on the number of foreign tourists. In addition, the result identified that the pollution, denoted by the carbon dioxide emissions, affected foreign tourist demand like an inverted U-shaped Kuznets curve. It implies that environmental pollution in developing countries has increased gradually which negatively influenced the demand of international travelers as well as the growth of the tourism sector. However, the quality of institutions and infrastructure in the host countries can have positive effects on the demand for international tourists. Finally, some policy implications are included for enhancing the tourist industry in developing countries.