LAUSR

In this paper, we test the causal relationship between economic growth and tourism development in the 1995–2012 period using recently developed panel Granger causality tests that allow for country-level heterogeneity, thus leading to more accurate results for the 12 Mediterranean countries. Although results of the Dumitrescu and Hurlin [(2012) testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29(4), 1450–1460] panel Granger causality test show a unidirectional causality from tourism development to economic growth, results of the Croux and Reusens [(2013). Do stock prices contain predictive power for the future economic activity? A Granger causality analysis in the frequency domain. Journal of Macroeconomics, 35, 93–103] panel Granger causality analysis in the frequency domain show that there is a bidirectional temporary and permanent causality between tourism development and economic growth. The bidirectional causality relationship between tourism development and economic growth, which is the main finding of this study, suggests that in order to achieve high economic growth, policy-makers should focus on developing the tourism sector.