Relationship Between Inflation And Tourism

This section reviews the existing studies on the relationship between urbanisation, inflation and tourism output. There are many studies that have argued that there is a relationship between urbanisation, inflation and tourism output. However, the empirical significance of the relationship that exists between these three variables is still unclear. On one hand, there are some studies that have argued that urbanisation and inflation is a deterrent to tourism output while on the other hand, studies have argued that urbanisation and inflation may boost tourism output.

To begin with, Cicerchia (1996) emphasized that in the modern era of rapid increase in urban population, measuring quality of life in the urban areas is becoming challenging

In the late 20th century, the literature on welfare effects of inflation has been polarised by contributions from Lucas (1993, 2000), Gillman (1993, 1995) and Dotsey and Ireland (1996). According to Chen et al. (2014), inflation is the sustained increase in price level that results in the decrease in welfare of Chinese citizens. The findings from this study is intriguing as it proves that if inflation increases by 0.1% in China, the welfare of Chinese citizens will decrease by 73.0 to 164.1 RMB. Importantly, this study also argued that the welfare costs of inflation vary depending on the different income groups. Low income groups are more affected by inflation than high income groups. This study has proved that there is negative relationship between inflation rate and welfare of the citizens. Chen et al. (2014) findings have been supported by Woodford (2002) and Nistico (2007). Fountas (2001) used time series data of UK and found that inflationary periods contribute to volatility in inflation expectations. This volatility in inflation expectations leads to lower output. Similarly, Woodford (2002) emphasized that monetary policy that is transmitted via inflationary channel causes welfare loss to private agents. Nistico (2007)

Narayan (2004) estimated the long-run impact of increase in tourism expenditure on Fiji’s economy. This study used the computable general equilibrium model to estimate the long-run relationship between tourism expenditure on Fiji’s economy. The findings from this study show that if tourists increase their expenditure by 10%, Gross Domestic Product (GDP) will increase by 0.5%. This study also argues that if tourist expenditure increases, the exchange rate will appreciate leading to inflation and increase in wage rate. As a result of this, the infant export sectors will experience decline in their export competitiveness. Studies on the importance of tourism sector to Fiji’s economy was further polarised by Narayan (2004b) and Narayan et al. (2010). Narayan (2004b) used the long-run co-integration and error correction models to examine the relationship between three time series variables. These three variables are (1) visitor arrivals, (2) real disposable income, and (3) hotel and substitute prices. This study used 30 years data in order to achieve robust results. The long-run findings from this study showed that if income from Fiji’s source markets increases, the visitor arrivals to Fiji will increase. Narayan et al. (2010) used panel data from Fiji, Solomon Islands, Tonga, and Papua New Guinea and examined the existence