Unemployment and Debt Dynamics in a Highly Indebted Small Open Economy

The paper analyzes the dynamic effects of a total factor productivity shock and an interest rate risk premium shock in a highly indebted open economy. In contrast to the standard open economy framework, search unemployment and wage bargaining are introduced. We find that a negative total factor productivity shock primarily has effects on the economy’s production side and on welfare, but not on its stock of foreign debt and the country specific risk premium, and large part of the adjustment happens in the short run. In contrast, a pure increase in the country specific risk premium causes substantial dynamics and a considerable reduction in foreign debt, allowing higher consumption in the long run and creating an intertemporal welfare gain, even though unemployment increases strongly in the short run. A 50% haircut of foreign debt significantly reduces the initial response of the unemployment rate. In case of a temporary productivity shock, sticky wages imply smaller employment, but generate higher welfare than flexible wages.unemployment, debt, interest rate premium, haircut, sticky wages

COVID-19: Consequências econômicas para uma pequena economia dependente do turismo

This paper analyzes the economic impact of the COVID-19 pandemic on a small tourism dependent open economy. The lockdown affected both the demand side and the supply side of the economy, as production of goods and services dramatically dropped due to firms’ shutdowns, broken supply chains, or bankruptcies, and aggregate demand diminished due to lower consumer confidence and investment cutbacks, accompanied by a dramatic fall in international tourism demand, in particular due to travel restrictions. We look on these supply and demand changes through the lens of a macroeconomic model of a small open economy, comprising an industrial and a tourism sector. For this purpose, we modify Schubert’s (2013) model by introducing a multiple shock which reflects (i) reduced sectoral productivities due to, e.g., broken supply chains, (ii) a drop in employment due to firms’ lockdowns, and (iii) a sharp decline in international tourism demand. We find that the multiple shock leads to an immediate drop in GDP and a boost of the short-run unemployment rate, followed by a gradual transition back to steady state. The adverse effects on the tourism sector are the more severe the slower international tourism demand reverts to pre-crisis levels, but they do not strongly spill over to the industrial sector. Furthermore, even if international tourism demand recovers quickly, the effects on the industrial sector barely change. The length of the industrial sector’s recovery basically depends on the speed of restoring its sectoral productivity rather than on international tourism demand. The reason for this result can be found in the absorbing effect of the relative price of tourism services in terms of the industrial good.Este artículo analiza el impacto económico de la pandemia de COVID-19 en una economía pequeña, abierta y dependiente del turismo. El lockdown afectó tanto al lado de la demanda, como al de la oferta de la economía, ya que la producción de bienes y servicios cayó drásticamente debido al cierre de empresas, cadenas de suministro interrumpidas o quiebras. La demanda agregada ha disminuido debido a la menor confianza del consumidor y los recortes de la inversión, acompañada de una caída dramática en la demanda turística internacional, en particular debido a las restricciones de viaje. Vemos estos cambios en la oferta y la demanda a través de la lente de un modelo macroeconómico de una pequeña economía abierta que comprende un sector industrial y uno turístico. Para ello, modificamos el modelo de Schubert (2013), introduciendo un shock múltiple que refleja (i) la reducción de la productividad del sector debido, por ejemplo, a cadenas de suministro interrumpidas, (ii) una caída del empleo por cierre de empresas, y (iii) una fuerte caída de la demanda de turismo internacional. Descubrimos que el choque múltiple conduce a una caída inmediata del PIB y un aumento de la tasa de desempleo a corto plazo, seguido de una transición gradual de regreso al estado estacionario. Los efectos adversos sobre el sector turístico son tanto más graves cuanto más lento es el retorno de la demanda turística internacional a los niveles anteriores a la crisis. Sin embargo, los efectos sobre el turismo no afectan fuertemente al sector industrial. Además, incluso si la demanda turística internacional se recupera rápidamente, los efectos sobre el sector industrial cambian poco. La duración de la recuperación del sector industrial depende básicamente de la velocidad de recuperación de su productividad sectorial, y no de la demanda turística internacional. La razón de este resultado se puede encontrar en el poder de absorción del precio relativo de los servicios turísticos en términos de bienes industriales.Este artigo analisa o impacto econômico da pandemia de COVID-19 em uma pequena economia aberta e dependente do turismo. O lockdown afetou tanto o lado da demanda, quanto o lado da oferta da economia, uma vez que a produção de bens e serviços caiu drasticamente devido a fechamentos de empresas, cadeias de abastecimento interrompidas ou falências. A demanda agregada diminuiu devido à menor confiança do consumidor e cortes de investimentos, acompanhados por uma queda dramática na demanda de turismo internacional, em particular devido a restrições de viagens. Vemos essas mudanças na oferta e na demanda pelas lentes de um modelo macroeconômico de uma pequena economia aberta que compreende um setor industrial e um de turismo. Para este efeito, modificamos o modelo de Schubert (2013), introduzindo um choque múltiplo que reflete (i) produtividade setorial reduzida devido a, por exemplo, cadeias de abastecimento interrompidas, (ii) uma queda no emprego devido ao fechamento de empresas, e (iii) um declínio acentuado na demanda de turismo internacional. Descobrimos que o choque múltiplo leva a uma queda imediata do PIB e um aumento da taxa de desemprego de curto prazo, seguido por uma transição gradual de volta ao estado estacionário. Os efeitos adversos sobre o setor de turismo são tanto mais graves quanto mais lenta for o retorno da demanda turística internacional aos níveis anteriores à crise. Contudo, os efeitos sobre o turismo não afetam fortemente o setor industrial. Além disso, mesmo que a demanda turística internacional se recupere rapidamente, os efeitos sobre o setor industrial praticamente não mudam. A duração da recuperação do setor industrial depende basicamente da velocidade de restauração de sua produtividade setorial, e não da demanda turística internacional. A razão para esse resultado pode ser encontrada no poder de absorção do preço relativo dos serviços turísticos em termos do bem industrial

The Dynamic Effects of Subsidizing the Tourism Sector

The paper studies the short run and long run effects of a production subsidy to the tourism sector of a small open economy, which can also be thought as a region within a country. We introduce a two-sector dynamic general equilibrium model where the tourism sector is considered to be labor-intensive and produces traded services. The other sector is capital-intensive and produces a nontraded good, which is also used for capital accumulation. Labor and capital can freely move between sectors. Economic decisions are made by forward-looking representative agents, which optimize their intertemporal welfare by choosing consumption of both the nontraded good and tourism services, the sectoral allocation of labor, and the rate of wealth accumulation. We discuss the short run, dynamic and long run effects of a production subsidy to the tourism sector. In the short run, the introduction of a subsidy to tourism production leads to a boom in that sector. As time passes, the economy-wide capital stock is decumulated, and production of tourism is falling. In the long run, compared to the situation before the subsidy was implemented, tourism production remains on a higher level, whereas output of the nontraded good drops.dynamic open economy two-sector model; tourism; subsidies; deindustrialization

THE ECONOMIC EFFECTS OF ADVERTISING ON TOURISM DEMAND

In this paper we introduce a dynamic model to study the macroeconomic effects of advertising activities in tourism. The agents of the model are a representative consumer which optimize their intertemporal welfare, a representative firm that produces tourism services, an authority which organizes tourism advertising abroad and foreigner tourists. We show that in the short run, an increase in marketing expenditures raises foreigner's tourism demand, leads to an increase in the relative price of tourism services, makes tourism production more attractive and stimulates capital investment. As time passes, the capital stock increases and tourism production expands, leading to a falling price of tourism. In the long run, the increase in marketing activities results in a higher rate of tourism production, a higher capital stock, a lower relative price of tourism services and a reduction of net foreign assets.

A Dynamic Model of Economic Growth in a Small Tourism Driven Economy

The paper studies the dynamics of economic growth caused by an increase in the growth rate of tourism demand. We develop a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services (island economy model), populated by a large number of intertemporally optimizing agents, deriving utility from consuming an imported good. Tourism services are produced by means of a simple AK technology by using imported capital, its accumulation associated with adjustment costs. Moreover, the economy can lend or borrow at the international financial markets at the given world interest rate. Adjustments in the relative price of tourism services ensure market clearance for tourism services. The long-run growth rate of the economy is tied to the growth rate in tourism demand. An increase in the latter increases thus the economy’s long-run balanced growth rate. In contrast to the standard one-good small open economy endogenous growth model, where the economy is always on its balanced growth path, we show that there are transitional dynamics after an increase in the growth rate of tourism demand. In particular, the short-run growth rate of output rises gradually towards its higher long-run level, and the market price of tourism increases during transition. Thus, an increase in the growth of tourism demand, say, caused by higher economic growth abroad, leads to a boom in the small open economy and increasing terms of trade. Adjustments of the relative price of tourism services (i. e. the real exchange rate) can therefore not protect the economy from demand disturbances.tourism demand; growth; economic dynamics

Dynamic Effects of Oil Price Shocks and their Impact on the Current Account

Our objective is to study the dynamic effects of an oil price shock on economic key variables and on the current account of a small open economy. To do this, we introduce time non-separable preferences in a standard model of a small open economy, where labor supply is endogenous and imported oil is used both as an intermediate input in production and as a consumption good. Using a plausible calibration of the model, we show that the changes in output and employment are quite small, and that the current account exhibits the J-curve property, both being in line with recent empirical evidence. After an oil price increase, the current account first deteriorates, and after some time it turns into surplus. We explain this non-monotonic behavior with agents' reluctance to change their consumption expenditures, resulting in an initial trade balance deficit which causes the current account to deteriorate. Over time, with gradually falling expenditures, the trade balance improves sufficiently to turn the current account into surplus. The model thus provides a plausible explanation of recent empirical findings

Coping with Externalities in Tourism - A Dynamic Optimal Taxation Approach

The paper studies optimal taxation (subvention) when tourism is associated with „multiple externalities“, using a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services and populated by a large number of intertemporally optimizing agents. Depending on the volume of tourism production, the externality can be either positive or negative. We show that the first best optimum, achieved by a central planner, recognizing the externality, can be replicated in a decentralized economy by using a time-varying tax rate. This ensures that (i) the steady state of the first best optimum is reached and that (ii) the speed of convergence to steady state is socially optimal

The Dynamic Effects of Subsidizing the Tourism Sector

The paper studies the short run and long run effects of a production subsidy to the tourism sector of a small open economy, which can also be thought as a region within a country. We introduce a two-sector dynamic general equilibrium model where the tourism sector is considered to be labor-intensive and produces traded services. The other sector is capital-intensive and produces a nontraded good, which is also used for capital accumulation. Labor and capital can freely move between sectors. Economic decisions are made by forward-looking representative agents, which optimize their intertemporal welfare by choosing consumption of both the nontraded good and tourism services, the sectoral allocation of labor, and the rate of wealth accumulation. We discuss the short run, dynamic and long run effects of a production subsidy to the tourism sector. In the short run, the introduction of a subsidy to tourism production leads to a boom in that sector. As time passes, the economy-wide capital stock is decumulated, and production of tourism is falling. In the long run, compared to the situation before the subsidy was implemented, tourism production remains on a higher level, whereas output of the nontraded good drops

A Dynamic Model of Economic Growth in a Small Tourism Driven Economy

The paper studies the dynamics of economic growth caused by an increase in the growth rate of tourism demand. We develop a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services (island economy model), populated by a large number of intertemporally optimizing agents, deriving utility from consuming an imported good. Tourism services are produced by means of a simple AK technology by using imported capital, its accumulation associated with adjustment costs. Moreover, the economy can lend or borrow at the international financial markets at the given world interest rate. Adjustments in the relative price of tourism services ensure market clearance for tourism services. The long-run growth rate of the economy is tied to the growth rate in tourism demand. An increase in the latter increases thus the economy’s long-run balanced growth rate. In contrast to the standard one-good small open economy endogenous growth model, where the economy is always on its balanced growth path, we show that there are transitional dynamics after an increase in the growth rate of tourism demand. In particular, the short-run growth rate of output rises gradually towards its higher long-run level, and the market price of tourism increases during transition. Thus, an increase in the growth of tourism demand, say, caused by higher economic growth abroad, leads to a boom in the small open economy and increasing terms of trade. Adjustments of the relative price of tourism services (i. e. the real exchange rate) can therefore not protect the economy from demand disturbances

A Dynamic Model of Economic Growth in a Small Tourism Driven Economy

The paper studies the dynamics of economic growth caused by an increase in the growth rate of tourism demand. We develop a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services (island economy model), populated by a large number of intertemporally optimizing agents, deriving utility from consuming an imported good. Tourism services are produced by means of a simple AK technology by using imported capital, its accumulation associated with adjustment costs. Moreover, the economy can lend or borrow at the international financial markets at the given world interest rate. Adjustments in the relative price of tourism services ensure market clearance for tourism services. The long-run growth rate of the economy is tied to the growth rate in tourism demand. An increase in the latter increases thus the economy’s long-run balanced growth rate. In contrast to the standard one-good small open economy endogenous growth model, where the economy is always on its balanced growth path, we show that there are transitional dynamics after an increase in the growth rate of tourism demand. In particular, the short-run growth rate of output rises gradually towards its higher long-run level, and the market price of tourism increases during transition. Thus, an increase in the growth of tourism demand, say, caused by higher economic growth abroad, leads to a boom in the small open economy and increasing terms of trade. Adjustments of the relative price of tourism services (i. e. the real exchange rate) can therefore not protect the economy from demand disturbances