A new perspective on the linkages between tourism demand and business cycles

Abstract

Business cycles, that is, the irregular fluctuations in economic activity, affect tourism demand—this is a stylized fact in tourism research. And it is well-founded. After all, as incomes rise, so does the consumption of goods and services, including tourism; tourism falls into the category of normal (or luxury) goods and services. This reasoning, however, may offer no assurance to tourism-exporting countries. International tourists, who have many destinations to choose from, may prefer one over another. Thus, the benefits accruing from rising tourism demand abroad would differ across tourism-exporting countries: each would be concerned with the impact of foreign business cycles on its own tourism exports. Therefore, several important questions arise for a tourism-exporting country: Are foreign business cycles correlated with demand for its tourism services? If yes, how strong are the correlations? What is the lag with which tourism demand is affected by business cycles? Does seasonality, which typifies tourism demand, mask the association between business cycles and tourism demand cycles? This study is devoted to answering these questions in the context of the demand for New Zealand (NZ) tourism by employing the recently developed Hamilton (2018) filter as well as the frequently used Hodrick-Prescott filter (Hodrick & Prescott, 1997). While the latter is foundational to numerous analyses in economics and tourism research, the former is relatively new. We also use a difference filter to perform robustness checks. Thus, from a methodological standpoint, we contribute to the literature by presenting the first detailed comparative analysis of business cycles and tourism demand linkages using three different data filters.