Multicollinearity in Tourism Demand Model : Evidence from Indonesia

Abstract

The demand for tourism in Indonesia continues to increase every year but cannot reach thepredetermined target. Studies on tourism demand have been done a lot, especially in Indonesia.The selection of the dependent variable in tourism demand is not problematic and acceptable,however, the selection of the independent variable is still unclear. This study aims to provide anappropriate Indonesian tourism demand model and analyze the determinants of tourism demandin Indonesia. The estimation technique used is a static panel regression. The results of this studyprove that there is multicollinearity in the tourism demand model when exchange rate and relativeprice are combined into one model, showing that relative price are good proxies in representingtourism price, and showing that substitution price are the main determinants of tourism demand inIndonesia. The policy implications recommended in this study are monitoring the economicgrowth of the origin countries of most tourists visiting Indonesia, improving the qual ity ofIndonesian tourism, and developing the Wonderful Indonesia program.