Is tourism growth able to shrink economic inequalities? A DSGE analysis

Abstract

The aim of this paper is to investigate the relationship between inbound tourism and economic inequalities (income and wealth). We construct a dynamic stochastic general equilibrium (DSGE) small open-economy model that includes the tourism industry and the housing market. We focus on the recent Icelandic tourism boom, and our simulation results suggest a reduction in income inequality and an increase in wealth inequality. Inbound tourism thus has opposite effects on domestic income inequality and wealth inequality, so the Icelandic government faces a trade-off when formulating tourism-related policies to reduce inequalities, and the consequences may depend on the type of inequality that policymakers prioritize. Lastly, implications are provided based on results.

Keywords

• Inbound tourism
• Income inequality
• Wealth inequality
• Dynamic stochastic general equilibrium (DSGE) modeling