Tourism's Impact on Long-Run Mexican Economic Growth

Abstract

Tourism is one of the most important factors in the productivity of the Mexican economy with significant multiplier effects on economic activity. This paper investigates possible causal relationships between tourism expenditure, real exchange rate and economic growth by using quarterly data. Johansen co-integration analysis shows the existence of one cointegrated vector among real GDP, tourism expenditure, and real exchange rate where the corresponding elasticities are positive. The tourism-led growth hypothesis is confirmed through cointegration and causality testing. Expenditure is weakly exogenous to real GDP producing a more than proportional effect in growth (it means real GDP increases 60% more when expenditure in tourism is increased). Short-run Granger causality shows that causality goes from expenditure to GDP, and there is a bidirectional short-run causality between real exchange rate and real GDP. Impulse response analysis shows that a shock in expenditure produce a continuous positive effect on growth while a shock in real exchange rate produces first a negative effect and then a positive one.