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Welfare effects of tourism-driven Dutch disease: The roles of international borrowings and factor intensity

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  • Chen, Ping-ho
  • Lai, Ching-chong
  • Chu, Hsun

Abstract

This paper develops a two-sector dynamic general equilibrium model to analyze the welfare implications of the Dutch disease induced by the demand shock arising from a tourism boom. Compared with the existing literature, we introduce two new elements, namely, international borrowings and the relative factor-intensiveness, and examine their interplay with the welfare effects of the Dutch disease. We show that (i) when the household can freely borrow from the world financial market, the Dutch disease will not affect welfare; (ii) when the economy is closed to the world financial market, the Dutch disease is beneficial (harmful) to the residents' welfare if the tourism good sector is capital-intensive (labor-intensive). Moreover, this paper provides a simulation analysis to examine the welfare effect of both the steady-state and the transitional responses arising from a tourism boom.

Suggested Citation

  • Chen, Ping-ho & Lai, Ching-chong & Chu, Hsun, 2016. "Welfare effects of tourism-driven Dutch disease: The roles of international borrowings and factor intensity," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 381-394.
  • Handle: RePEc:eee:reveco:v:44:y:2016:i:c:p:381-394
    DOI: 10.1016/j.iref.2016.02.004
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    Keywords

    Dutch disease; International borrowings; Factor intensity; Tourism expansion;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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