Forecasting Croatian inbound tourism demand

The aim of this paper is to present a forecasting model for the overnight stays of foreign tourists in Croatia. Tourism is one of the most important parts of the Croatian economy. It is particularly important in the context of the services sector. Regular and significant surpluses and the consumption of foreign guests are an important element of budget revenues, especially VAT. The ability to forecast the development of inbound tourism demand in a timely manner is crucial for both business decisions and policy-making. We combine the Granger causality test for identifying leading indicators with a grid search of the weights used to construct a composite indicator. An endogenous grid search for data driven weights was employed to minimise the mean absolute percentage error (MAPE) of the out-of-sample forecast. In total, we carried out 7.7 billion out-of-sample regressions in order to find the optimal combination of leading indicator weights. Results indicate that only four out of the 12 identified leading indicators are relevant in explaining variations in inbound tourism demand. The most important leading indicators are: real GDP and imports in Poland and gross wages in the Czech Republic and Slovakia.