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.