Applied Econometrics and International Development Vol. 10-1 (2010) COINTEGRATION ANALYSIS OF TOURISM DEMAND FOR TURKEY KETENCI, Natalya 1 Abstract This paper estimates the tourism demand model for Turkey from 14 countries: Austria, Belgium, Bulgaria, Denmark, France, Germany, Greece, Holland, Italy, Russia, Sweden, Switzerland, the United Kingdom and the United States. Different approaches were used to find cointegration in the considered model for the period from 1996 to 2000 on a monthly basis. From our results we found evidence at the high significance level of a long-run cointegration relationship among the variables. We found that income plays a more important role in the holiday-making decisions of tourists than the relative prices of the holiday destination. Inclusion in the model substitution destination decreased the degree of significance of relative Turkish prices in the demand model. JEL Classification Codes: C32, C52, F14, F41 Keywords: tourism demand, elasticity, cointegration, vector error correction. _______________________________________________________________________ 1. Introduction Tourism is one of the important sectors in the Turkish economy. The contribution of tourism sector to the gross domestic product of Turkey is increasing with every year. The share of tourism in total exports increased from 6% in 1984 to 13% in 2007 with a peak of 19% in 2003. However, in real terms the income of tourism exports (in million dollars) continuously increased throughout these years, more than three times for the considered period between 1996 and 2007, or by 33 times from 1984 to 2007. The number of tourist arrivals has increased by 132% in the last 10 years (Turkish Statistical Institute, Central Bank of the Republic of Turkey). It increased from 8.5 million to 19.8 million tourists, with a sharp decline in 1999 to 7.5 million tourists following strong recovery in 2000, reaching 10.4 million tourists. The sharp decline was due to the earthquake in August 1999. According to the World Travel and Tourism Council (2008) the tourism economy in Turkey directly and indirectly accounts for 11.3% of the GDP. It is expected that in the forthcoming 10 years the tourism economy will grow by 4.8% annually. Taking into account that tourism is one of the primary sources of foreign currency earning and employment generation, and considering the growing role of tourism in the economy of Turkey, it is surprising that so little attention has been paid to it in the literature and in particular to the economic determinants of the tourism for Turkey. Icos et al. (1998) in their research used a multivariable regression model where variables such as the number of ministry licensed hotel beds, the number of incoming travel agencies in Turkey, consumer price index and exchange rates show the number of tourists who came to Turkey from 10 selected European countries for the period between 1982 and 1993. The results of their study showed that the considered independent variables had slight effect on the number of tourists from selected European countries. The elasticities of the price index were found negative for most of the countries with high coefficient, while the 1 Natalya Ketenci, Department of Economics, Yeditepe University, Kayisdagi, 34755, Istanbul, Turkey. E-mail: nketenci@yeditepe.edu.tr