Effects of Tourism, Economic Growth, Real Exchange Rate, Structural Changes and Hurricanes in Jamaica

Abstract

The study examines the causal relationships among changes in tourism, economic growth, the real exchange rate, structural changes and hurricanes in Jamaica from 1963 to 2008. The Johansen cointegration test and autoregressive distributed lag estimates are used to determine the long-run equilibrium relationships among the variables. In both the short term and the long run, an increase in tourism (both arrivals and real expenditures) causes expansion in economic growth, with tourist arrivals yielding more robust results. In the long run, economic growth causes appreciation (a fall in the real exchange rate), whereas tourism growth causes depreciation, although their overall combined effects are appreciation. Depreciation increases tourist arrivals and real expenditures, but has conflicting effects on economic growth. Hurricanes result in appreciation, whereas the effects of structural changes are mixed. Additionally, hurricanes result in a decline in tourist real expenditure, and cause tourist arrivals to fall briefly before reversing into a modest increase. The tourism-led economic growth findings for both the short term and long run, albeit modest, imply that it can be worthwhile to extend incentives to promote Jamaica as a tourist destination.