Tourism and the Output Gap

Abstract

This article investigates the impact of tourism arrivals on a host country’s output gap, defined as the difference between actual gross domestic product (GDP) and trend GDP. Using panel data methods that account for the potential endogeneity of tourism and the business cycle, and the possible nonstationarity of tourism arrivals, the results show that an increase in tourism arrivals significantly improves the output gap of the host country. Quantitatively, a 10% increase in arrivals in a given year improves the output gap in that year by approximately 0.2% of actual GDP. There is, however, no evidence of a lagged effect of tourism. Based on this empirical evidence, the article concludes that tourism is a mechanism through which the domestic economy can take advantage of positive shocks happening elsewhere in the world. In this sense, tourism can contribute to the synchronization of business cycles between destination and origin countries.