Revisiting the Tourism-led Growth Hypothesis: The Case of Tonga using the FARDL Model and Fourier TY Causality Test

In this study, we revisit the tourism-led economic growth hypothesis for Tonga using the Fourier autoregressive distributed lag (FARDL) and Fourier Toda–Yamamoto (TY) causality test, using quarterly data over the sample from 1995Q1 to 2019Q4. The flexible Fourier form allows for incorporating the gradual effect of structural breaks without requiring structural break dummy variables, which are subject to the overfitting problem. The FARDL estimates indicate that tourism contributes positively to long-run growth. The Fourier TY causality test suggests unidirectional causality from tourism to economic growth. The results are robust after additional control variables, such as government expenditure, total trade, remittances, financial development and interaction effects between remittances and financial development. Appropriate attention is paid to remedying endogeneity biases by re-estimation with the generalised method of moments (GMM) estimator. JEL Codes: C22, Z23