Estimation of Foreign Tourism Demand in Iran (TVP Approach)

The main purpose of this paper is to estimate the foreign tourism demand for Iran during 1971-2005. This study proposes a new methodology – the time varying parameter (TVP) approach – to tourism demand modeling. To that end, the behavioral change of tourists over time is traced using the Kalman filter approach. Findings show that the income elasticity, price elasticity and habit formation have a regular declining trend over time. The elasticity of tourism demand with respect to the world per capita income is greater than that of the "cost of living" and "habit formation" indicators. The foreign tourism appears to be a normal good and inelastic to the domestic prices. In addition, tourism demand has decreased significantly during the Iran-Iraq war period.