Prescribing for the tourism-induced Dutch disease: A DSGE analysis of subsidy policies

Hongru Zhang and Yang Yang
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Hongru Zhang: Jiangxi University of Finance and Economics, China
Yang Yang: Temple University, USA

Tourism Economics, 2019, vol. 25, issue 6, 942-963

Abstract: Tourism-induced Dutch disease can be particularly detrimental to small open economies due to deindustrialization and potential long-term welfare loss. This study adopts an innovative macroeconomic modelling tool, dynamic stochastic general equilibrium modelling, to investigate the effects of external inbound tourism booms on the national economic account of a small open economy. The results confirm the existence of Dutch disease, but tourism booms also bring welfare gains to the destination country. We further model the effects of two strategies to mitigate the Dutch disease by assuming that the government can tax the tourism sector and subsidize the manufacturing sector in two ways: production subsidies and investment subsidies. The results show that the effectiveness of production subsidies is very modest, while investment subsidies can almost completely overturn the Dutch disease. In terms of welfare, investment subsidies lower welfare gains in the very short term, but the positive effects persist over the longer term, which is different from the production subsidy case. Last, practical implications are provided.

Keywords: Dutch disease; dynamic stochastic general equilibrium modelling; government subsidy; tourism tax (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:toueco:v:25:y:2019:i:6:p:942-963

DOI: 10.1177/1354816618813046

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