Modelling the association between tourism and real exchange rates

Abstract

ABSTRACT Fiji’s tourism industry has evolved significantly over the past 3 decades with past and present governments striving to support the development of the sector. In this study, we test the association between tourism measured by international visitor arrivals and Fiji’s real exchange rate using annual data over the period 1980–2018. Structural breaks are identified with the Gregory-Hansen test, and cointegration is confirmed with the Bayer-Hanck test. Nonlinear estimation is conducted with the nonlinear ARDL model. The results indicate that a 1% increase in tourism appreciates the real exchange rate by 0.42% whereas a 1% decrease however would depreciate the real exchange rate by about 0.32%. The findings raise concerns parallel to the Dutch Disease models and has implications for the measurement of tourism prices in tourism demand models.