Tourism Volatility and Economic Growth in Caribbean Small States

Travel and tourism are vital to Caribbean Small States, driving economic growth, employment, foreign direct investment, and foreign exchange reserves. However, heavy reliance on tourism, coupled with high debt, limited fiscal space, and vulnerability to natural disasters, increases exposure to external shocks and threatens long‐term sustainability. While most existing studies examine the relationship between tourism and economic growth, they do so through a static lens, overlooking the role of tourism volatility and its implications for sustainable growth. This study fills that gap by adopting a sustainability perspective and assessing how fluctuations in tourism revenue, measured as the three‐period rolling standard deviation and indicating the absence of sustained tourism activity, affect economic growth. We employ a panel vector autoregression model to capture dynamic interrelationships between variables using data from the nine most tourism‐dependent Caribbean countries, identified by their high tourism ‐to‐GDP ratios, covering the period from 1995 to 2019 to avoid distortions caused by the COVID‐19 pandemic. Results reveal that a shock to tourism volatility is associated with an immediate 1.5 percentage points decline in GDP growth and a lower growth path by approximately 1.0 percentage point in the medium to long‐run. These findings, robust across model specifications, underscore the need for economic diversification and policies that strengthen the sustainability and resilience of the Caribbean tourism sector against future disruptions.