Abstract
The current study investigates the effects of the United States’ FED monetary policy changes on tourism and hospitality stock returns in France which ranks first in international tourism markets. Monthly time series data from 1995 and onward are analyzed using the autoregressive distributed lag approach. Results from time series analyses reveal that the FED’s monetary policy changes exert statistically and long-term significant effects on the stock returns of tourism and hospitality firms in France. The study confirms that monetary policy changes by the FED significantly drive tourism stock returns in France. This study concludes that the FED monetary policy exerts multifaceted effects on French tourism and hospitality stock returns. Thus, policy implications for the cases of adverse and/or positive effects are presented at the end of this study.
Introduction
A country’s monetary policy, which includes interest rates, money supply, and credit availability, affects the stock market returns. When the interest rates are low, investors are more likely to invest in the stock market, which results in higher stock prices. Conversely, when interest rates are high, investors are less likely to invest in the stock market, resulting in lower stock prices. Stock market determinants are mainly explained by the Efficient Market Hypothesis (EMH), which is controversial and of particular interest to researchers and has been validated by many studies (Ţiţan, 2015). According to the EMH, stock prices on financial markets, particularly the stock market, effectively consider all relevant information. In other words, a stock’s price at any given time reflects all information that is currently available about the company. The three varieties of EMH are weak, semi-strong, and strong, with each type indicating how quickly and accurately certain sorts of information are reflected in stock prices (Malkiel, 1989). On the other hand, the effects of monetary policy on stock markets can also be attributed to the expectations hypothesis suggesting that investors’ expectations of upcoming changes in monetary policy as well as present monetary policy measures are likely to have an impact on stock market returns (Bekaert & Hodrick, 2001). That is, investors may become more upbeat about economic prospects and boost their stock investments if they believe that the central bank will pursue a loose or accommodative monetary policy in the future (i.e., lower interest rates or execute other expansionary measures). Such a positive sentiment can lead to higher stock market returns in the present.
On the other hand, investors may become less optimistic about economic growth and lower their stock holdings if they anticipate the central bank will pursue a tight or restrictive monetary policy in the future (i.e., by raising interest rates or implementing contractionary measures). This negative sentiment can result in lower stock market returns. It’s important to remember that the connection between monetary policy and stock market returns can be complicated and dependent on several factors. Market sentiment, the state of the economy, and other outside factors can all have a significant impact on how the stock market moves (Irani et al., 2022). Additionally, central banks’ guidance and communication regarding their long-term policy goals can affect investor expectations, which in turn affects stock market behavior (Hansen & McMahon, 2016). As a result, depending on the current state of the economy and investor sentiment, the effect of monetary policy on stock market gains may not always be clear-cut.
Changes in monetary policy are linked to stock market movements in the literature studies. Tiryaki et al. (2019) find that the effects of money supply on stock returns are asymmetric in the case of Turkey; they also suggest that tight monetary policy appears to retard the stock returns more than an easy monetary policy that stimulates them. Neuhierl and Weber (2019) find that the path of interest rates matters for asset prices, and monetary policy affects asset prices continuously.
On the other hand, the global financial landscape is highly interconnected, with various economic, political, and technological factors contributing to a complex web of relationships and dependencies. Several key aspects highlight the interconnected nature of the global financial system including (1) trade and investment flows, (2) financial markets, (3) global banking system, (4) macroeconomic policies, (5) technology and communication, and (6) global institutions and agreements. Therefore, understanding and navigating the interconnected nature of the global financial landscape is essential for policymakers, investors, and businesses to manage risks and capitalize on opportunities in an increasingly interdependent world.
Financial markets around the world are increasingly interconnected as well; thus, developments in one region can have ripple effects on markets globally. Furthermore, cross-border investments and financial instruments create linkages that transmit shocks across economies. For example, the US dollar’s status as the primary global reserve currency amplifies the impact of US monetary policy globally. Changes in US interest rates affect the attractiveness of dollar-denominated assets, influencing investment decisions worldwide. Furthermore, the US monetary policy not only impacts global markets through interest rates but also through exchange rates, consumer spending as impacted by interest rate and exchange rate changes, and stock market reactions. However, transmission mechanisms from major central banks to other emerging markets are rarely also examined in the literature.
Irani et al. (2022) search for the role of sentiment and monetary policy in explaining the changes in the Mexican tourism firms’ stock returns and find that domestic consumer sentiment exerts a stronger effect on tourism stock returns than domestic business sentiment. Furthermore, Irani et al. (2022) find that changes in the United States’ (US) interest rate policy positively influence Mexican tourism stock returns. Clark et al. (2020) examine the drivers of net private capital flows to emerging market economies (EMEs), focusing in particular on the policies of the Federal Reserve (FED) and that confirm that U.S. monetary policy, credit spreads, economic growth differentials, and commodity prices all significantly affect EME capital flows. Tillmann et al. (2019) examine the spillover effects of U.S. monetary policy on EMEs and find substantially nonlinear and asymmetric spillover effects. Mavromatis (2018), on the other hand, examines the role of U.S. monetary regimes on optimal monetary policy in the Euro area and finds that the U.S. monetary regime switches significantly impact Eurozone optimal monetary policy changes through domestic macroeconomic dynamics such as inflation and output volatility.
The international tourism and hospitality industry is another leading service provider, significantly contributing to many economies. The tourism-led growth (TLG) hypothesis in the relevant literature characterizes the role of this industry, which mainly contains airlines, hotels, restaurants, and other related businesses. This industry’s performance is affected by various factors, including changes in the global economy, geopolitical events, and currency fluctuations (Balaguer & Cantavella-Jordá, 2002; Katircioglu, 2009). On the other hand, the determinants of tourism & hospitality stock returns (or prices) are rarely examined in the relevant literature. Chen (2007) finds that business conditions exert long-term effects on the stock prices of tourism firms in China and Taiwan. Katircioglu and Katircioglu (2023) confirm the long-term significant effects of the business & finance environment on the stock performance of Turkish tourism firms using a stock valuation model. Although macroeconomic factors are examined as determinants of the stock performance of tourism & hospitality firms in the literature, further attention is needed to investigate if monetary policies are significantly linked to stock returns in this industry since there is quite rare evidence in this field as documented earlier in this study.
Against this backdrop, this study investigates the role of the US FED’s monetary policy changes on tourism and hospitality stock returns in France, which ranks first in international tourist markets by receiving 89.4 million international tourists (World Bank, 2023). Unlike the previous works, which examined the role of domestic monetary policy on stock returns except for Irani et al. (2022), this study analyzes the effects of the US FED’s monetary policy changes on tourism and hospitality stock markets in France. The main motivation for such a research idea is that the US FED is the actor in the global financial system and its monetary policy immediately is likely to impact the global financial and industry markets significantly. For example, when the US FED changes interest rates, not only domestic markets but international markets are likely to react toward such changes. As a result, interest rates and exchange rates are expected to change globally. These changes might result in the cost of borrowing for investment purposes, consumer spending and/or behavior in the tourism and hospitality industry, and stock market reactions not only because of the FED’s monetary policy directly but also because of changes in investment and consumer spending indirectly. Therefore, the global impact of the FED’s monetary policy deserves strong attention from researchers. On the other hand, the selection of French tourism stock markets in this study is important since France has been the most visited destination around the globe for many years. Furthermore, studying the effects of FED monetary policy changes on the French tourism stock markets is important for the literature as it contributes to a broader understanding of global financial dynamics in the tourism and hospitality industry, provides insights for risk management and policy decisions in the industry, and adds valuable information for investors and academics interested in the complexities of the financial markets related with this industry. In parallel to this backdrop in the literature, this study then proposes the following hypothesis:
H1: Changes in the FED’s Monetary Policy exert statistically significant effects on international tourism stock markets
The following section describes the data and methodology of the study, Section 3 presents results and discussions, and Section 4 concludes the study.
Data & Methodology
Data
The current study uses monthly data whose periods differ according to sample firms under inspection as described in Table 1. The study sample comprises publicly listed tourism and hospitality firms in France. The main selected U.S. monetary policy variables are also presented in Table 1. Additionally, national monetary variables in France are used as control variables in addition to the U.S. monetary policy variables. The selection of independent variables is done in parallel with previous works.
Data Description.
Methodology
The study proposes the following functional form of regression to estimate the effects of the U.S. monetary policy changes on French tourism and hospitality stock returns:
Where
S.R. stands for stock returns at time t, US_MP stands for the U.S. monetary policy tool at time t, and CV stands for control variables at time t under inspection.
The following double logarithmic regression is then estimated to capture the growth effects of all regressors on stock returns:
Where
the term ln stands for the logarithmic form of series, β0 is the intercept, β1 is the elasticity coefficient of US_MP, β2 is the elasticity coefficient of CV, and ε is error disturbance at time t.
Before estimating Equation 2, econometric priori needs to be investigated. Firstly, the Dickey-Fuller unit root tests are used in the study, which considers one breakpoint in the series and uses the framework of Perron (1989) to test the stationary nature of the series under consideration. All the tests are done with (1) intercept but without trend and (2) trend and intercept specifications. Then, the study estimates the long-run coefficients, the coefficient of short-run adjustments, and diagnostic properties for Equation 2 by the autoregressive distributed lag (ARDL) from Pesaran et al. (2001) after conducting the bounds tests for level relationships in Equation 2, which includes non-stationary series. Finally, to further support the study’s earlier findings, Granger causality tests using the block exogeneity approach, impulse response functions, and variance decompositions have also been carried out.
The dependent variable (SPt) in Equation 2 might not react toward its long-term equilibrium path quickly; therefore, the discrepancy between the long-term and short-term values of SPt can be eliminated by error correction modeling (ECM) as formulated below in the case a cointegrated relationship is obtained in Equation 2:
Equation 3 can be rewritten in the following detailed form with regard to monetary policy tools:
Where Δ is the first difference operator, εt−1 is the one-lagged error correction term (ECT), and μt is the error disturbance. The ECT term shows how fast SPt in Equation 2 reacts toward its long-term equilibrium path every period in percent terms.
Results
Table 2 presents the Dickey-Fuller unit root tests exhibiting that series, except for lnDC and lnDIR for France, are integrated of order one, I (1). However, lnDC and lnDIR are stationary at their level forms; thus, they are integrated of order zero, I (0). This is because the DF test statistics for the level forms of these two series are statistically significant and the null hypothesis of a unit root can be rejected. Since a mixed order of integration in regressors is obtained, the ARDL approach would be ideal for estimating Equation 2. The pre-condition for using the ARDL methodology is that the dependent variable needs to be integrated of order one, I (1), the results of this study meet it (Pesaran et al., 2001).
Unit Root Tests.
Notes. DFT stands for Dickey-Fuller min. t-statistic including trend and intercept; DFI stands for Dickey-Fuler min t-statistic including intercept only. *, **, and *** denote statistical significance at the .01, .05, and .10 levels.
Table 3 presents the ARDL results for Equation 2. Firstly, bounds F-statistics are statistically significant in the case of the selected companies, denoting that the long-term link between the U.S. monetary policy changes and firm-level tourism and hospitality stock movements in France is confirmed. Thus, it is inferred that changes in the U.S. monetary policy exert statistically long-term effects on the stock performances of French tourism and hospitality firms where these major findings are consistent with the findings of Irani et al. (2022). It is worth noting the speed of adjustment between short-term and long-term equilibrium values as estimated through the coefficients of ECTs are also negative, as expected, and statistically significant in the case of all firms. This finding reveals that firms’ stock values converge toward their long-term equilibria significantly but at different and moderate levels for each firm through the channels of U.S. monetary policy changes.
The ARDL Results.
Note.εt−1 is the error correction term. L.M. is the Lagrange multiplier test for autocorrelation; J.B. is the Jargue-Bera test for normality; the Ramsey test is for the stability of parameters. In bounds F and t-tests, c denotes statistical significance, a denotes statistical insignificance, and b denotes that the test is inconclusive. Finally, *, **, and *** denote statistical significance at the .01, .05, and .10 levels.
On the other hand, long-term coefficients from Equation 2 seem to be generally and statistically significant in Table 3. It is seen that the U.S. monetary policy changes generally exert mixed effects on firm-level stock returns; in some firms, stock returns are influenced adversely by those policy changes, while in others, those influences are in the same direction. This finding is attributed to (1) the type of U.S. monetary policy tool under inspection and (2) firm-level financial and operational characteristics. Possible reasons and factors are detailed in the conclusion section.
Domestic factors such as international tourist arrivals to France positively affect the stock returns of most firms, as expected. Changes in domestic money supply volume, as proxied by domestic credits, exert positively significant effects on some stock returns, which mean lower interest rates and cause switches from deposit accounts toward stock markets as expected. Such a reality can also be observed in the case of domestic deposit rates (lnDIR), where the coefficients of these rates for some firms are negatively significant.
As a further checking, Table 4 presents the Granger causality test results in a unidirectional form where stock returns are dependent variables. It is observed that changes in money supply in the US as proxied by domestic credit volume precede significant changes in tourism firms’ stock returns most of the time while changes in the other US monetary policy tools precede changes in stock returns only in several firms. Thus, it is apparent that financing via the banking system of the United States plays a significant and crucial role in driving foreign stock movements in the tourism and hospitality industry. Table 4 also shows that domestic factors such as international tourist arrivals and domestic monetary policy tools precede rare effects on tourism stocks in France. Finally, Table 4 shows that there is an overall causality that runs from the US monetary policy tools and domestic factors to the French tourism stock movements all the time.
The Granger Causality Test Results.
Note.ε t−1 is the error correction term. L.M. is the Lagrange multiplier test for autocorrelation; J.B. is the Jargue-Bera test for normality; the Ramsey test is for the stability of parameters. In bounds F and t-tests, c denotes statistical significance, a denotes statistical insignificance, and b denotes that the test is inconclusive. Finally, *, **, and *** denote statistical significance at the .01, .05, and .10 levels.
Figure 1 plots the impulse responses of stock prices to shocks in regressors under consideration. It is observed that shocks given to the US long-term interest rates, for example, lead to significant reactions in the French tourism stock markets in general slightly more than the other US monetary policy tools. Among the other significant US monetary policy tools are US deposit interest rates, real interest rates, domestic credits, and US money supply (M2).
Impulse responses.
Finally, Table 5 presents the variance decompositions, which reveal that in the initial periods, lower levels of the forecast error variance of the French tourism stocks are explained by exogenous shocks to the US monetary policy tools and domestic factors. These ratios seem to increase in the later periods. The highest ratios in general are obtained in the cases of deposit interest rates and long-term interest rates which are then followed by real interest rates and money supply (M2). Variance decomposition ratios are not high in the case of the US inflation rates (CPI).
Variance Decompositions.
Conclusion
Summary of Findings and Implications
The current study analyzes the effects of the US FED’s monetary policy changes on the stock returns of French tourism and hospitality firms. Results confirm these policy changes have long-term and statistically significant effects on stock returns. Furthermore, results reveal significant effects with mixed signs of coefficients depending on the monetary policy tool and the stock (financial) performance of the firm under inspection. These results are parallel with the findings of Hou et al. (2024) for the banking and finance industry, Liu and Chen (2024) for the Chinese bond market, Irani et al. (2022), and Chen (2007) for the tourism and hospitality stock markets. Changes in the United States’ monetary policy can also exert significant ripple effects on global financial markets and economies, which could indirectly impact the stock returns of French tourism and hospitality firms. A number of reasons could be responsible for the positive effects of US monetary policy: (1) Shifting exchange rates and interest rates; for instance, a higher USD is probably going to spur more international visitors to France, which will boost company stock returns. (2) Global economic growth: If the US economy is performing well due to accommodating monetary policies, this could increase demand for goods and services like tourism around the world. A stronger US economy would lead to higher consumer spending on travel and tourism, which would benefit French travel and hospitality businesses and potentially boost stock returns. (3) Investor sentiment and risk appetite: a more accommodating stance by the Fed may lead to a rise in investor confidence and a readiness to put money into riskier assets, such as companies in the travel and hospitality sector. This might boost the returns on French hotel and tourism stocks and raise interest in them. (4) Global liquidity and capital flows: The Federal Reserve’s expansionary monetary policy may lead to increased liquidity in global financial markets. In other markets, such as the French stock market, where firms in the travel and hospitality sectors can yield better returns, this could encourage investors to seek out bigger gains. And (5) business and consumer spending: if the US economy is doing well and consumer confidence is rising, this could lead to more people spending money on leisure and travel, which would benefit French travel and hospitality companies and potentially increase their stock returns.
However, a number of additional factors could also be responsible for the negative consequences of US monetary policy: (1) Impact on exchange rates: if the US Federal Reserve tightens monetary policy or raises interest rates, the US dollar may become more valuable relative to other currencies, such the Euro. Because of a higher US dollar, travel to France may become more costly for tourists from other countries, especially the US. There may be less demand for the services provided by French tourism and hospitality companies, which could impact their stock returns if fewer foreign tourists visit France. (2) A slowdown in global economic development could result from tighter US monetary policy. If the United States economy contracts due to stringent regulations, there may be a decrease in the demand for goods and services, especially tourism, worldwide. A decline in worldwide economic activity would hinder the revenue and profitability of French tourism and hospitality enterprises and potentially reduce stock returns, as fewer people would visit France for leisure or business. (3) Investor risk aversion, wherein shifts in US monetary policy may cause changes in investor sentiment and risk appetite. The Federal Reserve may become more hawkish and raise interest rates more rapidly, which would enhance market volatility and investor risk aversion. This might make investors more cautious and reduce their exposure to riskier assets, like stocks in the travel and hospitality sector. Stock returns may suffer as a result of decreased demand for French hotel and tourism stocks. (4) Higher borrowing costs: If US monetary policy tightens, borrowing rates could go up everywhere, including for French businesses. Increased borrowing costs may limit the ability of French tourism and hospitality companies that depend on debt financing to invest in expansion prospects and lower their profit margins. A negative impact on their stock’s performance may result from this. (5) Constraints on consumer spending: If shifts in US monetary policy lead to higher interest rates and lower consumer spending in the US, this could affect US tourists’ overall purchasing power. This could result in fewer US visitors to France, which would affect French travel and hospitality businesses’ revenue and potentially reduce stock returns. And (6) macroeconomic uncertainty, wherein shifts in US monetary policy could cause global financial markets to become more uncertain. Consumer and business confidence might suffer from uncertainty, which may lead to a downturn in travel and tourism. This uncertainty may result in poorer stock returns and negative financial outcomes for French travel and lodging companies.
It’s important to note that the effect of the US monetary policy on foreign tourism and hospitality stock returns is complex and multifaceted. The actual impact of US monetary policy changes on French stocks, for example, will depend on a variety of factors, including the overall health of the global economy, geopolitical events, and domestic economic conditions in France. Additionally, stock returns are influenced by a wide range of factors other than monetary policy, including company-specific performance, industry trends, and market sentiment. The findings of the current study show that significant effects of the FED’s monetary policy could relate to the financial situation in the United States and other nations that rely heavily on tourism through two important channels, (1) interest rate and (2) exchange rate effects, as far as investment, consumer spending, travel choices, competitiveness, and global interdependencies are concerned.
On the other hand, in times of adverse effects of the FED’s monetary policy changes, tourism and hospitality firms could refer to (1) diversify their portfolios, (2) promote domestic tourism, (3) have a better provision of financial assistance in the form of grants, tax breaks, and low-interest loans, (4) improve competitiveness by investing in marketing, staff training, and the development of new products and services, and finally, (5) coordinate with international partners. On the other hand, in times of positive effects, policymakers can (1) still promote domestic tourism, (2) improve sustainability by investing in green infrastructure, conservation efforts, and waste reduction initiatives, (3) improve human resources, (4) and risk management for the possibility of a sudden decrease in foreign tourist arrivals.
Limitations and Further Research Directions
Studying the relationship between USA Federal Reserve (Fed) monetary policy changes and global tourism stock movements can be a complex issue with potential limitations such as (1) data availability and quality, (2) econometric causality where other external factors might be major determinants, (3) lagged effects where selecting a true lag length might be difficult since monetary policy most of the time exerts delayed effects on the economy, (4) global interdependencies, (5) market sentiment and investor behavior where quantifying investor expectations and sentiment can be difficult, and (6) the selection of the proper econometric methodology and modeling. Considering such limitations, researchers studying the nexus between Fed monetary policy changes and global tourism stock movements should exercise caution and consider alternative explanations and factors that may influence their findings.
Further research can also be designed for the case of (1) other major monetary policy actors and (2) other economic agents besides the tourism and hospitality industry in different countries. Additionally, (3) the role of investor sentiment and behavioral biases in response to FED policy changes can be worth investigating which might offer insights into how psychological factors influence tourism stock returns.
Footnotes
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Data Availability Statement
Data used in the study will be provided by the corresponding authors upon a reasonable request.