Examining The Causal Relationship Between Tourism, Exchange Rate, And Economic Growth In Tourism Island States: Evidence From Second-Generation Panel

ABSTRACT

In this article, we examine whether tourism is a useful predictor of economic growth in tourism island states. Since tourism has been argued to stimulate and contribute to economic growth, it is on this premise that this study investigates the predictive power of tourism on economic growth and vice versa by incorporating real exchange rate as an additional variable over the period 1995–2016 for 16 selected tourism island states. We make use of panel bootstrapping cointegration testing approach that accounts for cross-sectional dependence to examine whether there is a long-run relationship between the variables. For causality, we make use of Granger non-causality in heterogeneous panel. Our results suggest tourism-induced growth, exchange rate-induced growth, and exchange rate-induced tourism hypotheses for tourism island states.

KEYWORDS:

• Tourism
• economic growth
• real exchange rate
• Granger causality
• panel approach
• tourism island states

Acknowledgments

We would like to thank the anonymous referee(s) for many helpful comments. However, any remaining errors are solely ours.

Notes

1. In this paper, we use tourism island states to proxy for small island developing states that are tourist destinations. For more information on tourism island states, see Akadiri et al. (2017). Is there growth impact of tourism? Evidence from selected small island states. Current Issues in Tourism, 1–19.

2. More information on this can be read from https://www.cnbc.com/2016/09/29/tourism-how-much-do-countries-spend-to-attract-tourists.html.

3. Also read Dumitrescu and Hurlin (2012). Testing for Granger non-causality in heterogeneous panels.