Resumen de Prescribing for the tourism-induced Dutch disease: A DSGE analysis of subsidy policies
Tourism-induced Dutch disease can be particularly detrimental to small open economies due todeindustrialization and potential long-term welfare loss. This study adopts an innovative macro-economic modelling tool, dynamic stochastic general equilibrium modelling, to investigate theeffects of external inbound tourism booms on the national economic account of a small openeconomy. The results confirm the existence of Dutch disease, but tourism booms also bringwelfare gains to the destination country. We further model the effects of two strategies to mitigatethe Dutch disease by assuming that the government can tax the tourism sector and subsidize themanufacturing sector in two ways: production subsidies and investment subsidies. The resultsshow that the effectiveness of production subsidies is very modest, while investment subsidies canalmost completely overturn the Dutch disease. In terms of welfare, investment subsidies lowerwelfare gains in the very short term, but the positive effects persist over the longer term, which isdifferent from the production subsidy case. Last, practical implications are provided.
