Abstract
This paper employs a novel identification strategy to provide a consistent estimate of the elasticity of tourist arrivals with respect to oil prices. We exploit OPEC announcements about future production as exogenous shocks to oil prices within an instrumental variables’ framework. Using monthly panel data on international and domestic tourist arrivals for 23 European countries from 2005:1 to 2019:12, we estimate an average elasticity of −0.2 for both segments. Auxiliary analyses reveal the existence of relevant heterogeneity across geographical areas. When considering dynamic effects using instrumental panel local projections (LP-IV), we find evidence of long-lasting negative impacts of oil price spikes on both international and domestic tourism inflows. The use of an exogenous instrument for oil prices addresses endogeneity concerns and underscores the importance of isolating supply-driven price changes to obtain unbiased estimates of the transportation cost elasticity of tourism demand.
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