Tourism and financial development: evidence from nonlinear ARDL approach

This paper investigates the nonlinear effect of financial development on tourism demand, using Japan and Germany as two cases. Two measures, such as liquid-liabilities and credit to the private sector by banks as a percentage of GDP, work as proxies for financial development. Using monthly data over the period 1994:1-2019:12 for Germany and 1996:1-2019:12 for Japan, we have estimated for each country a parsimonious tourism demand function that incorporates both measures of financial development. The findings from the nonlinear ARDL approach show that for each country, tourism demand, price of tourism, and financial development are cointegrated, and the nonlinearity of financial development is mainly a long-run phenomenon. In the long run, a positive change in the level of financial development will positively influence tourism demand and negatively affect it following a negative change. Each country's negative effect appears to be of a slightly smaller magnitude. This might be because Japan and Germany have a better reputation among tourists owing to their higher level of financial development and concomitant lower rate of crime, which in turn minimizes the negative effect of financial development on tourism demand.