Money Trails

A study explores how interest rates and money supply shape tourism flows and spending across small Pacific Island economies

- Parth Singh

Tourism is often seen as a reflection of how confident people feel about the economy. When wallets are full and borrowing is cheap, more people book flights and hotel rooms. A new study by researchers from IIT Hyderabad, IIT Kanpur, the Reserve Bank of Fiji and the Central Bank of Solomon Islands explores this relationship to determine if monetary policy can influence the number of tourists that visit small island nations, and how much they spend once they get there.

The paper, titled “Role of Monetary Policy in Tourism Demand: Evidence from Pacific Island Countries”, examines data from 1995 to 2019 across countries such as Fiji, Samoa, Tonga, Vanuatu and the Solomon Islands. Using statistical tools like Granger causality and panel-regression analysis, the authors investigate whether changes in interest rates and money supply, the two key levers of monetary policy, affect tourism demand.

The study begins by confirming what many policymakers already suspect. Tourism and economic growth feed off each other. In the Pacific Island countries, tourism contributes heavily to GDP and employment. Fiji, for instance, draws more than half a million visitors a year and earns over half its export revenue from tourism.

Using causality tests, the researchers find that this relationship runs both ways. A stronger economy tends to attract more tourists by improving infrastructure, safety and services. At the same time, higher tourist arrivals boost growth through spending, job creation and foreign-exchange earnings.

Money Matters