53rd Congress of the European Regional Science Association: "Regional Integration: Europe, the Mediterranean and the World Economy", 27-31 August 2013, Palermo, Italy
The supply of international air transport by low cost carriers (LCC) recorded a tenfold increase in Italy over the last decade. Such rapid expansion, by affecting transport costs, is likely to have induced significant effects on both the level and the composition of foreign tourism inflows. In this paper, by combining time series data from the Bank of Italy survey of foreign tourism with information from a novel dataset on the scheduled international passenger capacity operated by LCC, we study both the short and long run dynamics of foreign tourism and low cost air transport in Italy. Having fitted a cointegrated VAR model to the data, we document the existence of a single long run equilibrium relation between main foreign tourism demand/supply factors and the supply of international low cost flights. On the basis of a proper identification scheme, we subsequently study the response of a number of foreign tourism demand variables (total expenditure, number of arrivals, length of the journey, daily expenditure) to an exogenous shock to LCC supply.