Exchange rate elasticities of international tourism and the role of dominant currency pricing

In this paper, we estimate exchange rate elasticities of international tourism. Both the bilateral exchange rate and the U.S. dollar exchange rate relative to tourism origin countries are important drivers of international tourism flows. The U.S. dollar exchange rate is more important for tourism destination countries with higher U.S. dollar borrowing, pointing to a complementarity between U.S. dollar pricing and financing. Country-specific dominant currencies (CSDCs) play only a minor role on average but are important for tourism-dependent countries and those with a high concentration of foreign tourists across origin countries. Consistent with the literature of dominant currency pricing (DCP), we also find that local hotel prices do increase strongly when the domestic currency depreciates against the U.S. dollar. The importance of the U.S. dollar exchange rate represents a strong piece of evidence of DCP in the international trade of services. The results suggest that the benefits of exchange rate flexibility for tourism-dependent countries may be weaker than previously thought and that a broad appreciation of the U.S. dollar can be associated with a significant decline in tourism flows globally.