Asymmetric effects of economic policy uncertainty and exchange rates on international air travel demand: The case from Hong Kong

Abstract

Despite the growing body of literature on economic policy uncertainty (EPU) and exchange rate, the potential nonlinear effects of EPU and exchange rate on international air travel demand have been largely neglected. This study aims to investigate the asymmetric effects of EPU and exchange rate on inbound air travel demand in Hong Kong from nine markets (Taiwan, Korea, Japan, Singapore, the UK, Malaysia, Indonesia, Canada, and India). Using monthly data from January 2002 to December 2021, the nonlinear estimation results revealed that EPU has a significant asymmetric long-run impact on air travel demand for Hong Kong, while its effect was negligible in the linear model. Travelers react strongly to EPU in response to rising uncertainty in economic policies, whereas they do not respond similarly to declining uncertainty. Rising uncertainty has a greater effect than falling uncertainty on travel demand from Taiwan, Korea, Japan, Canada, and India. Our findings support that travelers are loss-averse in their response to EPU shocks, providing important policy and managerial implications. This study also found that exchange rate changes have a nonlinear impact on air travel demand, reflecting travelers' asymmetric behavior in response to currency appreciation and depreciation.