Causal interactions among tourism, foreign direct investment, domestic credits, and economic growth: evidence from selected Mediterranean countries

Abstract

This study explores the nexus between tourism and economic growth in countries bordering the Mediterranean Sea while controlling for foreign direct investment and domestic credits as additional variables within a multivariate panel framework. Empirical evidence is based on annual data from 1995 to 2016 for a panel of 14 selected countries around the Mediterranean Sea region. The findings from the bootstrap panel cointegration test proposed by Westerlund (2007) confirm the long-run equilibrium relationship among the variables under inspection. Subsequently, the Panel Pooled Mean Group Autoregressive Distributed model (PMG-ARDL) estimations suggest positively significant relationships between tourism and economic growth both in short-term, and long-term periods. Thus, this study joins the group of studies that lend support to the tourism-led growth hypothesis. This result was further substantiated by the results of the Dumitrescu and Hurlin (2012) causality analysis, as feedback causality was observed between tourism and economic growth, while unidirectional causality was seen from foreign direct investment to economic growth. That is in support of the foreign direct investment-driven economic growth hypothesis. Strikingly, no causal relationship was observed between domestic credits and economic growth.