Examining time-varying economic impacts on tourism demand for Malaysia: A Kalman filter approach

Abstract

Due to the economic importance of tourism industry, this study examines the time varying economic impact on tourism demand for Malaysia. The data utilized in this study are the number of international tourist arrivals, exchange rate, relative price and substitute relative price covering the period from January 1999 to December 2016. The results showed that Kalman filter (KF) technique produced estimates that are clearly varying over the sample period rather than constant as implied in the ordinary least square (OLS) method. The Kalman filter estimation also showed that the speed of adjustment to long-run equilibrium following short-term deviation is faster during the first half of the sample period. In other words, the Kalman filter is found to be better mirror the short-run dynamic between tourism demand and the selected economic variables as the Kalman filter technique is able to produce time-varying and reliable estimates corresponding to the real economic and financial situations. To improve growth for Malaysia as holiday destination, government and related tourism authorities need to be sensitive to changes in global economic situations and as such tourism policies need to be continually revised.