Exchange rate pass‐through to restaurant and hotel prices in the United States: The role of energy prices and tourism development

• Published date: 01 May 2021
• Author: Ojonugwa Usman,Paul Terhemba Iorember,Gylych Jelilov
• Date: 01 May 2021
• DOI: http://doi.org/10.1002/pa.2214

ACADEMIC PAPER

Exchange rate pass-through to restaurant and hotel prices in

the United States: The role of energy prices and tourism

development

Ojonugwa Usman

1

| Paul Terhemba Iorember

2,3

| Gylych Jelilov

4

1

School of Business Education, Federal College

of Education (Technical), Potiskum, Yobe,

Nigeria

2

Faculty of Social Sciences, Nile University of

Nigeria, Abuja, Nigeria

3

Department of Economics, University of Jos,

Jos, Nigeria

4

Department of Economics, Nile University of

Nigeria, Abuja, Nigeria

Correspondence

*Ojonugwa Usman, School of Business

Education, Federal College of Education

(Technical), Potiskum, Yobe State, Nigeria.

Email: usmanojonugwa@gmail.com

This study incorporates energy prices and tourism development into the standard

purchasing power parity doctrine to investigate exchange rate pass-through to res-

taurant and hotel prices in the United States over the period 2001:Q4 to 2017:Q4.

We apply the multiple structural breaks cointegration test and flexible autoregressive

distributed lag (ARDL) method. Our empirical results provide evidence that exchange

rate appreciation reduces restaurant and hotel prices while an increase in energy

prices and tourism development causes the prices of restaurant and hotel to rise.

However, the pass-through of exchange rate, energy prices, and tourism develop-

ment is incomplete in both the long- and short-run with the long-run pass-through

having a stronger effect. Furthermore, the causality results show that restaurant and

hotel prices have predictive power for exchange rate. Causality between restaurant

and hotel prices and tourism development has a feedback effect. We also find that

exchange rate Granger causes not only energy prices but tourism development while

tourism development causes energy prices. The policy implications for these results

are carefully outlined in the study.

1|INTRODUCTION

Globally, energy is regarded as not only a determinant of economic

activity but also a major contributor to growth and development in

the highly industrialized economies such as the United States where

primary energy consumption grew to 101.3 quadrillion British thermal

units (Btu) in 2018. This represents a 4% increase from 2017 level and

0.3% above the record in 2007 (EIA, 2018). The share of the total

energy consumption by energy sources (inclusive of renewable energy

sector) is shown in Figure 1. This figure reveals that petroleum

accounts for 36% of the total energy consumption. This is followed by

the consumption of natural gas, which accounted for 31%. The con-

sumption of coal was 14%, renewable was 11% and nuclear electric

power energy was 8%. Furthermore, the imports of energy in the

United States amounted to 25.35 quadrillion Btu while energy exports

was 17.90 quadrillion Btu, making the net exports of energy of the

country to stand at 7.44 quadrillion Btu in 2017 (EIA, 2018). By

implication, United States is now the second largest user of energy in

the world after China as reported by EIA in 2018.

As reported by the American Petroleum Institute (2019), the oil

and natural gas industry contributes to over 10.3 million jobs and

about 8% of the nation's Gross Domestic Product.

This underscores the importance of energy in the U.S. economy

as an input to nearly every product and service (Iorember, Usman, &

Jelilov, 2019; Usman, Elsalih, & Koshadh, 2019; Usman, Olanipekun,

Iorember, & Goodman, 2020). Hence, a change in the existing level of

energy prices (EPR) is likely to influence consumer-spending decisions

in the various sectors of the economy including the hospitality indus-

try. Furthermore, tourism activities have become a catalyst for devel-

opment in the recent times. The available statistics according to the

World Travel and Tourism Council (WTTC, 2019) show that the

growth of global travel and tourism sector in 2018 was 3.9%. The

United States as the world's largest travel and tourism economy

recorded 2.2% growth of the tourism sector in 2018, which also

involves high level of exchange rate volatilities. This translates to

Received: 23 April 2020 Revised: 9 May 2020 Accepted: 31 May 2020

DOI: 10.1002/pa.2214

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https://doi.org/10.1002/pa.2214