Growth-Led Tourism and the Role of Exchange Rate: Empirical Evidence from Sri Lanka

Abstract

We revisit the growthled tourism hypothesis to examine the role of the exchange rate in the nexus. Using yearly data on Sri Lanka from 1995 to 2018, preliminary tests reveal a long-run association between tourism receipts, economic growth, and the official exchange rate. Consistent robustness results from a battery of econometric techniques validate that the connection holds autonomously and interactively. Conclusions drawn from the linear models suggest that a percentage change in economic growth increases tourism by 0.8% to 1.2%. Like-wise, the exchange rate boosts tourism by 0.006% to 0.008%, on average, ceteris paribus. For the most part, the interaction of the exchange rate with economic growth upholds the "growth-led tourism" hypothesis. We also find that the results hold across the conditional distribution of tourism. Additional evidence from the margin plot reveals that the effect of economic growth on tourism is positive as the Sri Lankan Rupee depreciates. The upward trend of the plot within the 95% confidence interval shows that currency depreciation enhances the impact of economic growth on tourism. These are novel contributions to the literature as it suggests that currency depreciation in Sri Lanka is pro-tourism. Policy recommendations are discussed.