Domestic air passenger traffic and economic growth in China: Evidence from heterogeneous panel models

• We examine the Granger causal relationship between APT and GDP using panel data.
• A long-run equilibrium relationship is found between APT and GDP.
• A long-run and strong Granger causal relationship is found between APT and GDP.
• A short-run uni-directional Granger causality running from APT to GDP is also found.

This paper applies recent panel methodology to examine the short-run dynamics, the long-run equilibrium relationships and the Granger causal relationship between economic growth and domestic air passenger traffic. It is based on the quarterly panel data of 29 provinces in China from the period of 2006Q1 to 2012Q3. Tests for panel unit roots, cointegration in heterogeneous panels and panel causality are employed in a bi-variate panel vector error correction model (PVECM), which is estimated by the system generalized moment method (SYS-GMM). The results show evidence of a long-run equilibrium relationship between economic growth and domestic air passenger traffic. Specifically, 1% increase in the air passenger traffic is found to lead to an increase of 0.943% in real gross domestic product (GDP). A long-run and strong bi-directional Granger causal relationship is found between these two series. It is also found that there is a short-run uni-directional Granger causality running from the domestic air passenger traffic to the economic growth.