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

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. © 2016 Elsevier Inc.