Examining the effects of exchange rates on Australian domestic tourism demand: A panel generalized least squares approach

Abstract

In Australia, domestic tourism generated AUD71 billion in 2009-10, representing approximately 75.6% of national tourism revenue. While the number of domestic overnight visitors increased by 2.3% in that year, the number of Australians travelling overseas grew by 15.9%. This shows that there is a high tendency for more Australians to travel overseas. There are two possible reasons: first, the introduction of low cost carriers has induced cheaper flights to overseas, particularly from Australia to South East Asia; second, the dramatic appreciation of Australian dollars against major currencies, as well as the strong growth of Australian household income, have motivated more Australians to travel overseas rather than within their own country. The purpose of this study is to examine the economic factors that influence the demand for Australian domestic tourism. In particular, the research explores to what extent the appreciation of Australian dollar could affect the Australian domestic tourism industry, as measured by the number of nights spent by domestic holiday visitors, business travelers and visitors of friends and relatives (VFR) from quarter 1 of 1999 to quarter 4 of 2010. Furthermore, the study employs panel generalized least squares models because they take account of both heteroskedasticity and serial correlation to produce optimistic estimated standard errors. The empirical findings show that exchange rates could influence the decisions to travel domestically within Australia by holiday travellers. It is likely that Australians who are seeking holidays would prefer travelling overseas when the Australian dollar is high.