Economic Policy Uncertainty and International Tourism Demand: A Global Vector Autoregressive Approach

Abstract

In a globalized environment, a major shock or event can reverberate across tourism interdependent countries over time. This paper aims to empirically examine how economic policy uncertainty (EPU) emanating from a large country may influence inbound and outbound tourism in other countries. Using Global Vector Autoregressive (GVAR) model and two alternative measures of EPU, the study finds the modeled effects of EPU are dependent on the source of EPU measures, level of internationalization, and type of trade-weights used. Notably, the results show the “decline-rebound-overshoot” effect of EPU shock on tourism demand, and capture the link between capital flight and outbound travel from China in times of surge in EPU. This research highlights that GVAR is able to capture previously unobserved empirical insights because assessing the international impact of shocks such as economic crises, pandemics, and political instability necessitates accounting for cross-sectional interdependence in tourism flows between many countries.