Research Note

Tourism Economics
2022, Vol. 28(5) 1333–1341
The influence of economic policy ª The Author(s) 2020
Article reuse guidelines:

uncertainty and geopolitical risk sagepub.com/journals-permissions

DOI: 10.1177/1354816620981199
journals.sagepub.com/home/teu
on US citizens overseas air
passenger travel by regional
destination
James E Payne
The University of Texas at El Paso, USA

Nicholas Apergis
University of Derby, UK

Abstract
This research note extends the literature on the role of economic policy uncertainty and
geopolitical risk on US citizens overseas air travel through the examination of the forecast error
variance decomposition of total overseas air travel and by regional destination. Our empirical
findings indicate that across regional destinations, US economic policy uncertainty explains more of
the forecast error variance of US overseas air travel, followed by geopolitical risk with global
economic policy uncertainty explaining a much smaller percentage of the forecast error variance.

Keywords
economic policy uncertainty, geopolitical risk, tourism demand, US overseas air travel

Introduction
For many countries, tourism provides for the acquisition of foreign exchange, the generation of
income from the consumption of goods and services by tourists, employment in tourism-related
service sectors, and tax revenues from tourist expenditures and businesses. Thus, understanding the
behavior of the determinants of tourism is essential for the planning necessary to accommodate
both domestic and international tourists. In addition to the traditional determinants of tourism

Corresponding author:
James E Payne, College of Business Administration, The University of Texas at El Paso, 500 W. University Avenue, El Paso,
TX 79968, USA.
Email: [email protected]
1334 Tourism Economics 28(5)

demand, such as exchange rates and income levels, uncertainty serves a prominent role in the
decision-making process for tourists with respect to their consumption decisions and for firms in
the tourism industry in terms of their investment decisions. As noted by Bernanke (1983) and
Giavazzi and McMahon (2012), if the precautionary motive takes hold, an increase in uncertainty
will likely reduce consumption and investment spending as individuals, firms, and governments
seek to minimize their future financial risk. With the emergence of the respective news-based
measures for economic policy uncertainty by Baker et al. (2016) and geopolitical risk by Cardara
and Iacoviello (2018), researchers have begun to explore the influence of such measures on the
tourism sector.1
The vast majority of studies find that economic policy uncertainty adversely impacts tourism
flow indicators2 (see Akadiri et al., 2020; Balli et al., 2018; Chen et al., 2020; Demir and Gozgor,
2018; Dragouni et al., 2016; Ghosh, 2019; Gozgor and Demir, 2018; Gozgor and Ongan, 2017;
Isik et al., 2020; Khan et al., 2020; Liu et al., 2020; Nguyen et al., 2020; Ongan and Gozgor,
2018; Payne et al., 2020; Sharma, 2019; Singh et al., 2019; Tsui et al., 2018; Wu and Wu, 2019,
2020). Moreover, studies by Alola et al. (2019), Akadiri et al. (2020), Balli et al. (2019), and
Tiwari et al. (2019) show the negative impact of geopolitical risk on tourism flow indicators as
well.3 With the exception of the study by Tiwari et al. (2019) who incorporate both the economic
policy uncertainty index of India and geopolitical risk in the analysis of tourist arrivals, the
remaining studies focus on measures of either economic policy uncertainty or geopolitical risk.
However, none of the previous studies incorporate country-specific economic policy uncer-
tainty, global economic policy uncertainty, and geopolitical risk to understand the relative
impact of each on tourism flows.
With the US a primary source market for many tourist destinations across the globe, this
research note attempts to address this omission in the literature by examining the dynamic
interplay between US and global economic policy uncertainty alongside geopolitical risk with
respect to US citizens overseas air travel in total and by regional destination. Specifically, we
estimate a vector autoregressive (VAR) model that includes US citizens overseas air travel, the
broad real effective exchange rate, per capita real personal disposable income, US economic policy
uncertainty, global economic policy uncertainty, and geopolitical risk with the variables denoted in
growth rates. Since the VAR model is expressed in a reduced form that explicitly considers the role
of all endogenous variables within the model, the examination of the forecast error variance
decomposition allows for the identification of the percentage of the forecast error variance
explained by each variable in response to a shock to the respective measures of US citizens
overseas air travel. The second section presents the data, methodology, and results. The third
section provides concluding remarks.

Data, methodology, and results

Our analysis utilizes monthly data from 2000:1 to 2019:10. Data on US citizens overseas air
passenger travel in total (TOTAL) and by eight regional destinations in order of air travel volume
(Europe, EUR; Caribbean, CAR; Asia, ASIA; Central America, CAM; South America, SAM;
Middle East, MIDE; Oceania, OCE; and Africa, AFR) were obtained from the US Department of
Commerce, International Trade Administration, Office of Travel and Tourism Industries and
seasonally adjusted using the X-11 procedure.4 Data for the broad real effective exchange rate
(BREER) and per capita real personal disposable income (PYPC) were drawn from the St. Louis
Federal Reserve Bank database, FRED II. In addition to the inclusion of the BREER and per capita
Payne and Apergis 1335

Table 1. Summary statistics.

Variable Mean Median Min. Max. SD CV

EUR 1,066,586.00 982,477.00 414,958.00 2,566,724.00 380,787.00 0.357

CAR 518,367.30 495,395.00 220,141.00 1,006,030.00 161,881.00 0.312
ASIA 399,548.40 392,314.00 176,244.00 611,415.00 82,784.82 0.207
CAM 200,369.60 95,348.50 73,723.00 364,499.00 64,281.57 0.321
SAM 167,880.80 162,754.00 99,264.00 290,232.00 37,327.28 0.222
MIDE 101,549.10 103,517.50 13,434.00 256,427.00 65,222.63 0.642
OCE 60,861.21 60,265.50 35,157.00 108,323.00 13,956.69 0.229
AFR 25,885.79 25,908.00 6,956.00 61,360.00 9,988.91 0.386
BREER 109.78 110.92 93.06 129.03 9.60 0.087
PYPC 38,711.17 38,211.50 33,112.00 45,809.00 3,213.93 0.083
USEPU 125.27 114.62 44.78 284.14 48.42 0.387
GEPU 120.52 109.63 48.37 306.83 51.55 0.428
GPR 103.79 82.62 27.21 545.09 70.67 0.681
TOTAL 2,541,048.00 2,424,824.00 1,422,363.00 5,131,219.00 648,864.80 0.255

Note: Min.: the minimum value; Max.: the maximum value; SD: standard deviation; CV: coefficient of variation; EUR: Europe;
CAR: Caribbean; ASIA: Asia; CAM: Central America; SAM: South America; MIDE: Middle East; OCE: Oceania; AFR: Africa;
BREER: broad real effective exchange rate; PYPC: per capita real personal disposable income; USEPU: US economic policy
uncertainty; GEPU: global economic policy uncertainty; GPR: geopolitical risk.

real disposable income as traditional determinants underlying tourism demand (Song et al., 2012),
we include three measures associated with uncertainty captured by the geopolitical risk (GPR)
index, the US economic policy uncertainty (USEPU) index, and the global economic policy
uncertainty (GEPU) index obtained from the website, www.policyuncertainty.com.5
The summary statistics for the respective variables are presented in Table 1. In evaluating US
citizens overseas air travel by regional destination, we observe the average passenger travel is the
greatest for EUR, followed by the CAR and ASIA and then CAM, SAM, the MIDE, OCE, and
AFR. The relative variability across regional destinations, measured by the coefficient of variation,
reveals the MIDE exhibits the greatest variation at 0.642, followed by AFR: 0.386, CAM: 0.321,
CAR: 0.312, OCE: 0.229, SAM: 0.222, and ASIA: 0.207. In regard to the BREER and PYPC, the
relative variation is 0.087 and 0.083, respectively. In terms of the three key variables of interest,
GPR index shows the greatest variation at 0.681, followed by GEPU index 0.428 and the USEPU
index 0.387.
In our analysis, we convert the variables to growth rates based on the first difference of the
natural logarithms of the respective variables.6 We begin by estimating unrestricted VAR models
in the spirit of Sims (1980) with the lag length determined by the Akaike information criterion in
total and by regional destination.7
X
p
Y_ t ¼ a0 þ qi Y_ ti þ u ð1Þ
i¼1

where Y_ t is a m  1 vector of jointly determined dependent

 0  variables defined 0in  growth rates and
ut is a m  1 vector of disturbances with Eðut Þ ¼ 0; E ut ut ¼ S for all t, E ut ut ¼ 0 for all t 6¼ t 0 ,
and S is a m  m positive definite covariance matrix. Within the VAR model each endogenous
1336 Tourism Economics 28(5)

variable is explained by its lagged values and the lagged values of all the endogenous variables in the
model. Equation (1) can be presented in an infinite moving average form as follows:
X
1
Y_ t ¼ Aj utj ð2Þ
j¼0

where the matrices Aj ¼ q 1 Aj1 þ q2 Aj2 þ . . . þ qp Ajp with j ¼ 1; 2; . . . , A 0 ¼ I m , Aj ¼ 0 for

j < 0: Based on the Cholesky decomposition of the covariance matrix of the shocks, ut ; as
0
S ¼ T T where T is a lower triangular matrix, the moving average representation of Equation (2)
can be rewritten as:
X
1
   X1
Y_ t ¼ Aj T T 1 utj ¼ Aj etj ð3Þ
j¼0 j¼0

 0  0 0 0
where Aj ¼ Aj T and et ¼ T 1 ut . Thus, E et et ¼ T 1 E ut ut T 1 ¼ T 1 ST 1 ¼ I m whereby
the error terms et obtained from the transformation matrix, T, are contemporaneously uncorrelated,
such that the shocks et are orthogonal to each other. With the orthogonalized moving average
representation in Equation (3), the forecast error variance decomposition for the ith variable in the
VAR model is given as follows:
XN  0 2
e Al T ej
l¼0 i
i; j; N ¼ XN ; i; j ¼ 1; 2; . . . ; m ð4Þ
0 0
ei Al SAl ei
l¼0

where T is defined by the Cholesky decomposition of S, ei is the m  1 selection vector of the

ith variable, and Al (l ¼ 1; 1; 2 . . . Þ represents the coefficient matrices in the moving average
representation. Equation (4) captures the proportion of the N-step ahead forecast error variance of
variable i, which is accounted for by the orthogonalized innovations in variable j.
The Cholesky decomposition isolates the structural errors by recursive orthogonalization,
whereby the variables are ordered based on the speed by which the variables act in response to
shocks. To this end, the variable ordering is the global economic policy uncertainty index, US
economic policy uncertainty index, geopolitical risk index, broad real effective exchange rate, per
capita real personal disposable income, and US overseas air travel.8 Finally, the forecast error
variance decompositions are used to evaluate the relative impact of the traditional tourism demand
determinants of the exchange rate and income along with the economic policy uncertainty mea-
sures and geopolitical risk on US overseas air travel.
The results from forecast error variance decompositions across all models at forecasting hor-
izons of 1 month, 12 months, and 60 months are presented in Table 2. In the evaluation of forecast
error variance for total US citizens overseas air travel at 60 months, we find the broad real effective
exchange rate and per capita real personal disposable income explain 3.60% and 16.36% of the
forecast error variance, respectively, whereas US economic policy uncertainty and the geopolitical
risk explain 28.73% and 23.81%, respectively, with global economic policy uncertainty explaining
only 6.04%. As we disaggregate total US citizens overseas air travel by regional destination, the
results exhibit some variation across regional destinations, but in general are quite similar. The
contribution of the broad real effective exchange rate in explaining the forecast error variance in
US citizens overseas air travel by regional destination at 60 months ranges from 1.33% in OCE to
Payne and Apergis 1337

Table 2. Forecast error variance decompositions of US overseas air travel (in months).

TOTAL: TOTAL GEPU USEPU GPR BREER PYPC

1 100.00 0.00 0.00 0.00 0.00 0.00

12 43.09 3.39 20.12 16.65 2.54 14.21
60 21.46 6.04 28.73 23.81 3.60 16.36
EUR: EUR GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 41.62 3.14 21.79 17.64 2.26 13.55
60 18.71 5.24 32.36 23.92 2.74 17.03
CAR: CAR GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 50.16 2.71 18.54 14.69 2.08 11.82
60 23.74 2.89 33.61 20.75 2.46 16.55
ASIA: ASIA GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 37.92 1.16 27.74 15.36 1.24 16.58
60 21.60 1.32 35.63 21.89 1.35 20.21
CAM: CAM GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 46.22 3.64 19.15 16.44 2.30 12.25
60 14.27 5.85 38.02 19.66 3.51 18.69
SAM: SAM GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 48.62 2.24 20.11 15.06 1.73 12.24
60 20.47 4.49 33.93 20.35 2.64 18.12
MIDE: MIDE GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 41.58 1.29 23.18 16.39 1.40 16.16
60 28.36 1.45 26.71 20.05 1.59 21.84
OCE: OCE GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 44.98 1.12 24.72 12.77 1.27 15.14
60 38.05 1.23 25.11 17.81 1.33 16.47
AFR: AFR GEPU USEPU GPR BREER PYPC
1 100.00 0.00 0.00 0.00 0.00 0.00
12 62.14 1.26 14.41 10.46 1.32 10.41
60 55.71 1.40 16.32 12.30 1.54 12.73

Note: EUR: Europe; CAR: Caribbean; ASIA: Asia; CAM: Central America; SAM: South America; MIDE: Middle East; OCE:
Oceania; AFR: Africa; BREER: broad real effective exchange rate; PYPC: per capita real personal disposable income; USEPU:
US economic policy uncertainty; GEPU: global economic policy uncertainty; GPR: geopolitical risk.

2.74% in EUR, while in the case of per capita real personal disposable income, the contribution
ranges from 12.73% in AFR to 21.84% in the MIDE. As for US economic policy uncertainty,
global economic policy uncertainty, and geopolitical risk measures, the contribution by each in
explaining the forecast error variance of US citizens overseas air travel varies considerably across
regional destinations. We show the percentage that US economic policy uncertainty explains the
forecast error variance of the respective US overseas air travel by regional destination ranges from
1338 Tourism Economics 28(5)

16.32% for AFR to 38.02% in CAM. Geopolitical risk follows US economic policy uncertainty in
terms of the percentage of forecast error variance explained, ranging from 12.30% in AFR to
23.90% in EUR. In only the cases of the MIDE and AFR does the percentage of the forecast error
variance explained by per capita real personal disposable income slightly exceed the percentage of
the forecast error variance explained by geopolitical risk. We find that global economic policy
uncertainty explains a relatively minor portion of the forecast error variance, ranging from 1.23%
for OCE to 5.24% in EUR.
The results reveal that the broad real effective exchange rate and per capita real personal dis-
posable income do not appear to be the primary determinants in explaining the forecast error
variance of US overseas air travel relative to the influence of US economic policy uncertainty and
geopolitical risk. Furthermore, our finding that US economic policy uncertainty serves a more
dominant role than global economic policy uncertainty in explaining the forecast error variance
parallels the findings of Singh et al. (2019) but runs counter to the results reported by Payne et al.
(2020). However, neither of these studies incorporated geopolitical risk in their analysis. Likewise,
our finding that US economic policy uncertainty explains a greater percentage of the forecast error
variance than geopolitical risk is in contrast to the findings Tiwari et al. (2019) who find that the
influence of geopolitical risk is stronger than the economic policy uncertainty index for India with
respect to the country’s tourist arrivals.

Concluding remarks
This research note examines the forecast error variance decomposition associated with the esti-
mation of VAR models that include the growth rates of US citizens overseas air travel (for total and
by regional destination), the broad real effective exchange rate, per capita real personal disposable
income, US economic policy uncertainty, global economic policy uncertainty, and geopolitical
risk. We find that US economic policy uncertainty explains more of the forecast error variance
associated with US citizens overseas air travel than either geopolitical risk or global economic
policy uncertainty. We also find that traditional tourism demand determinants with respect to the
broad real effective exchange rate and per capita real personal disposable income exhibit less of an
influence on US citizens overseas air travel relative to US economic policy uncertainty and
geopolitical risk. With domestic economic policy uncertainty and geopolitical risk serving as more
prominent factors underlying US overseas air travel, policy makers should focus efforts toward
maintaining policy stability and credibility to reduce the level of policy uncertainty and to the
extent possible mitigate geopolitical risk factors through coordinated efforts across countries. As
for the tourism industry, the consideration of the importance of including country-specific eco-
nomic policy uncertainty and geopolitical risk in the modeling of tourism behavior is pertinent to
planning and in the design of risk mitigation strategies for the tourism sector.

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.

Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
Payne and Apergis 1339

ORCID iD
James E Payne https://orcid.org/0000-0002-0594-9405

Notes
1. Economic policy uncertainty referenced pertains to the economic policy uncertainty indices developed by
Baker et al. (2016) and subsequent indices developed for a number of countries. See Baker et al. (2016) and
the link www.policyuncertainty.com for details on the news-based indices. See Cardara and Iacoviello
(2018) for details on the news-based geopolitical risk index.
2. Tourism indicators represent tourist arrivals/departures, receipts/expenditures, and hotel room demand.
3. Other-related studies include the impact of economic policy uncertainty and/or geopolitical risk on stock
returns of tourism companies (Demir and Ersan, 2019; Demiralay and Kilincarslan, 2019; Ersan et al.,
2019), investment in the hospitality industry (Akron et al. 2020), hotel operating performance (Madanoglu
and Ozdemir, 2018), and cash holdings of hospitality companies (Demir et al., 2019).
4. US citizens air passenger travel outside of North America (excludes Canada and Mexico). Note the data on
US citizens air passenger travel overseas end in 2019:10, and as such data during the COVID-19 pandemic
are not available.
5. The US economic policy uncertainty measure is an index of search results from 10 large US newspapers
for terms related to economic and policy uncertainty, such as “uncertainty” or “uncertain,” “economic” or
“economy” and one or more of the following terms: “congress,” “legislation,” “white house,” “regulation,”
“federal reserve,” or “deficit,” see Baker et al. (2016) for more details. The global economic policy
uncertainty measure is a gross domestic product-weighted average of national economic policy uncertainty
indices for 21 countries (Australia, Brazil, Canada, Chile, China, Colombia, France, Germany, Greece,
India, Ireland, Italy, Japan, Mexico, the Netherlands, Russia, South Korea, Spain, Sweden, United King-
dom, and the United States), see Davis (2016) for more details. The geopolitical risk index is based on the
search results from 11 leading international newspapers for six groups of words (Group 1 geopolitical risk
as well as mentioned military-related tensions involving large regions of the world and US involvement;
Group 2 is related to nuclear tensions; Group 3 terms related to war threats; Group 4 terms related to
terrorist threat; Groups 5 and 6 are related to actual adverse geopolitical events as opposed to just risks
such as actual terrorist attacks and war), see Caldara and Iacoviello (2018) for more details.
6. Augmented dickey-fuller generalized least squares (ADF-GLS) unit root tests (Elliott et al., 1996) avail-
able upon request demonstrate that the growth rates of the respective variables are integrated of order zero,
I(0).
7. Akaike information criteria (AIC) lag lengths for the respective vector autoregressive (VAR) models
associated with the US citizens overseas air travel in total and by regional destination are as follows:
TOTAL (3), Europe (3), Caribbean (5), Asia (5), Central America (5), South America (5), Middle East
(6), Oceania (5), and Africa (5).
8. The forecast error variance decompositions results did not change by changing the order of the variables
entering the VAR system.

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Author biographies
James E Payne serves as the dean of the College of Business Administration at The University of Texas at El
Paso and holds the Paul L. Foster and Alejandra de la Vega Foster Distinguished Chair in International
Business. Dr. Payne has authored over 265 peer-reviewed journal articles and currently serves as the editor-in-
chief of the Journal of Economics and Finance as well as an editorial board member for a dozen academic
journals.

Nicholas Apergis is a professor of Economics in the Business School (Division of Economics and Finance) at
the University of Derby, UK. Previously, he was with Curtin University, Australia, and the University of
Piraeus, Greece. He has authored over 250 peer-reviewed journal articles and currently serves as the editor-in-
chief of the International Journal of Financial Studies, the Energy Research Letters, and the Asian Journal of
Economics and Finance. According to the RePEc statistics, he ranks 111th in scholarly publications across
continental Europe.