THE EFFECTS OF ECONOMIC POLICY UNCERTAINTY ON OUTBOUND TRAVEL EXPENDITURES

Abstract

Tourism has been one of the fastest growing industries and it makes important contributions on economies. Based on this, the literature aims to determine the factors affecting tourism demand behavior. In this paper, we analyze the effect of economic policy uncertainty (EPU) on both total and personal outbound travel expenditures in the panel data of 17 developed and developing countries. This is the first paper to examine the impact of EPU on travel expenditures within a tourism demand framework. By using the fixed-effects and the Least Square Dummy Variable (LSDV) estimation techniques, we find that an increase in the level of uncertainty decreases travel expenditures. Our findings imply that when people experience an increase in uncertainty-related economic policies, they tend to decrease their expenditures abroad. On average, a one standard deviation rise in EPU leads to a 3% and a 6% decrease in the total and personal travel expenditures. We also find that the effect of EPU on travel expenditures is higher in developing economies compared to developed countries. The empirical results in this paper suggest that governments should realize the suppressing effect of uncertainties about their economic policies on tourism demand.