Economic Policy Uncertainty and Tourism Demand of OECD Countries in Mexico

Abstract

This paper analyzes the effects of Economic Policy Uncertainty (EPU) on tourism demand from the top nine OECD countries in Mexico during 2010-2018. The research studies two groups of economies: developed and emerging economies. Using panel data, the results show evidence of transversal dependence in income, exchange rate, EPU, and tourism arrivals. These variables are integrated of order one. In addition, there is a long-run equilibrium relationship among these variables. The group of developed countries show evidence of a negative relationship between tourism demand and EPU, implying that a higher level of uncertainty leads to a decline in tourism demand. However, in emerging economies this relationship is positive. Besides, results suggest a positive relationship of both income and exchange rate to tourism demand, which implies that a higher level of income in the OECD countries and a depreciation of the Mexican exchange rate might generate greater tourism demand in Mexico. In terms of short- and long-term causality relationship, evidence indicates that exchange rate, income and EPU contain important information that contribute to forecast the behavior of tourism demand in Mexico.