HOW TOURIST FLOWS ARE AFFECTED BY THE INTRODUCTION OF THE EURO?

International tourism demand has grown overtime and tourism now represents one of the most growing sector worldwide. International tourist arrivals reached 1,235 million in 2016 (UNWTO, 2017), and Europe with approximately 620 million international tourists, represents just over half the world’s total (50%; UNWTO, 2017). In 2002 a unique currency was introduced in some EU countries. Many applied research focuses on the effect of the common currency policy on Eurozone trade flows (Micco et al., 2003; Faruquee, 2004; Flam and Nordstrom, 2006; Aristotelous, 2006; Baldwin, 2006; Bun and Klaassen, 2007; Frankel, 2010; Camarero et al., 2013; Sadeh, 2014). On the contrary, to date very few papers analyse the effect of this monetary policy on exchange in the service sector, and specifically on tourism flows (Ràtz and Hinek, 2006; Gil-Pareja et al., 2007; Thompson and Thompson, 2010; De Vita, 2014; Santana-Gallego et al., 2010; 2016). The main aim of the present paper is to investigate whether and to what extent the introduction of euro affects tourist flows in a sample of European and non- European countries over the period 1995-2013. To do this, we apply a technique of policy evaluation named Synthetic control method (SCM henceforth) first proposed in a seminal work by Abadie and Gardeazabal in 2003. Using this methodology, we compare the post-euro tourism exchange trajectory of countries introducing the euro as common currency in 2002 (i.e. the treated unit) with the trajectory of countries not affected by the policy (i.e. non-treated countries).