Are shocks to tourism transitory at business cycle horizons?

The goal of this article is to propose a theoretical framework based on a macro model that can be used to examine the relative importance of permanent and transitory shocks in explaining variations in tourist expenditure and Gross Domestic Product (GDP) at business cycle horizons. We estimate the model for Australia. Our findings reveal a common-trend and common-cycle relationship among tourist expenditure and GDP, and the variance decomposition analysis of shocks reveals that at business cycle horizons permanent shocks explain the bulk of the variations in output, while transitory shocks explain the bulk of the variations in tourist expenditure.