Exchange rate fluctuations and demand for hotel accommodation: panel data evidence from Norway

Abstract

If, when and where to travel is normally planned in advance. Hence, the exchange rate at the time of booking accommodation is likely to play an important role in determining inbound tourist demand. That fluctuations in the exchange rate influence inbound hotel demand is well established in the literature, but the lag with which it influences demand has received limited attention. This paper sets out to remedy this, by estimating the elasticity of hotel demand and its lag structure with respect to exchange rate fluctuations. Our data consists of a panel of hotel beds sold per month in Norway to tourists from ten different source countries. Models with source country fixed effects were used to obtain the estimates. We find evidence that demand is approximately unit elastic and that it operates with a lag of two to three quarters with respect to the exchange rate. The latter result is key since it enables improved medium-term demand forecasts in the tourist industry.