Tourism as a determinant of long‐run economic growth

Abstract

This study investigates the relationships between tourism and economic growth. It does this by examining the South Tyrolean economy using the Johansen cointegration test to obtain a cointegrated vector among the relevant variables and the Granger causality test to investigate causality. Annual GDP data from 1980 to 2006, the number of foreign visitors to South Tyrol, and the relative prices (RP) between South Tyrol and Germany (the source of more than 60% of foreign tourists) are used. The Johansen cointegration test shows that the estimated long‐run elasticity of the real GDP with respect to tourism demand is 0.29 and the Granger causality test shows that causality goes unidirectionally from tourists and RP to real GDP. Therefore, the tourism‐led growth hypothesis is supported empirically in the case of South Tyrol. In other words, in South Tyrol, tourism reinforces long‐run economic growth but economic growth does not reinforce tourism. Impulse response analysis shows that a shock to the number of tourists and RP produces a continuous and sustained positive effect.