Is Tourism an Efficient Market? The Impact of Exchange Rate Fluctuations on International Tourism Outcomes

Abstract

In this thesis, I investigate the strength of the relationship between exchange rate fluctuations and international tourism outcomes to determine whether the tourism market fits the standard framework for market efficiency. In order to achieve a global and presently relevant perspective, the study considers 126 countries from 2002-2019, starting with the physical implementation of the euro and culminating prior to the COVID-19 pandemic, which introduced a major exogenous negative shock to the industry. While research on the topic exists, this paper extends the existing body of literature by taking a global perspective, rather than assessing a specific country or region, and by considering tourism flows measured by both tourist arrivals and tourist receipts, rather than only one of the two. Using a lagged OLS model with fixed effects, volatility effects, and control variables for macroeconomic and safety conditions, the primary regression finds that exchange rate movements are not reliable predictors of tourism outcomes. These results are confirmed across both dependent variables and across multiple alternative regressions, including subsamples that disregard outliers, countries grouped by shared characteristics, and regressions that consider alternative explanatory or dependent variables. Additional findings include that receipts are more sensitive to pricing signals than tourist arrivals are and that government stability is the explanatory variable most strongly linked to increases in inbound tourism. These findings suggest that rather than use currency devaluations as a tourism stimulant, policymakers should instead focus on improving the quality and stability of their governance structures to attract tourism through improved safety perceptions.