Causality between Economic Growth and Tourism Expansion: Empirical Evidence from Trentino-Alto Adige

Abstract

This short paper investigates the causal relations between tourism growth, relative prices and economic expansion for the Trentino-Alto Adige/Sidtirol, a region of northeast Italy bordering on Switzerland and Austria. Johansen cointegration analysis shows the existence of one cointegrated vector among real GDP, tourism and relative prices where the corresponding elasticities are positive. Tourism and relative prices are weakly exogenous to real GDP. A variation of the Granger Causality test developed by Toda and Yamamoto is performed to reveal the uni-directional causality from tourism to real GDP. Therefore the tourism-led growth hypothesis is supported empirically in this case. Impulse response analysis shows that a shock in tourism expenditure produces a fast positive effect on growth.