The balance of trade and exchange rates: Theory and contemporary evidence from tourism

Abstract

The purpose of this study is to investigate the effects of exchange rate depreciations and appreciations on the tourism trade balance. Specifically, we employed linear and nonlinear autoregressive distributed lag (ARDL) cointegration techniques to analyze the extent to which currency depreciations and appreciations affect the United States (U.S.) bilateral tourism trade with Canada, Mexico, and the United Kingdom (U.K.). The results showed that the depreciation of the U.S. dollar subsequently improves the U.S. trade balance with all three trading partners. However, while the appreciation of the U.S. dollar deteriorates the U.S. bilateral tourism trade balance with Canada and the U.K., it does not ultimately affect the U.S. bilateral tourism trade with Mexico in the long term. These results provide evidence contradicting the J-curve theory, supporting the postulations of the ML condition. Theoretical and policy implications are discussed within the realms of J-curve theory, Marshall-Lerner (ML) condition, international trade, and tourism.