The Dynamic Role of Financial Development in Analyzing the N-Shaped Tourism-Led Growth Hypothesis in Mauritius

Abstract

This study is a critical step to explore how financial development moderates the N-shaped tourism-led growth hypothesis in Mauritius, considering the rising influence of the tourism sector on this small island but a high-income country and the dearth of recent empirical studies in this direction. Relying on annual time series between 1980 and 2018, the study employed the ARDL model and the quantile ARDL model, a technique rarely applied in extant studies to analyze the possible nonlinear (N-shaped) dynamics of tourism and the moderating role of financial development on productivity in Mauritius. The various cointegration tests proved that the series have a common long-run trend, whereas the causality test validates the tourism-led growth hypothesis. The ARDL estimates reveal positive and significant impacts from tourism and financial development on economic growth, against the negative and insignificant effects of the other control variables in the long and short run. However, from the QARDL, the impacts of tourism and financial development on growth remained predominantly negative in the long term at all quantiles of economic growth except at q0.30, where a positive impact was recorded from tourism. However, in the short run, the contributions of tourism and financial development remained positive but insignificant across the distributions of economic growth, therefore buttressing the time-varying (N-shaped) nature of the relationship. By implication, policies that could shield the economy from shocks arising from business cycles and sustain the positive/significant contributions of tourism and financial system to economic growth are pertinent to boost the confidence of all stakeholders.