This article develops a dynamic optimising macro model that sheds light on two tourism stylised facts, namely, (i) the congestion externalities caused by tourism expansion and (ii) the wealth effect generated by the revenues from overseas tourism taxation. Based on the two salient characteristics, our positive analysis indicates that if tourism tax revenues are used to provide rebates to local residents, because of the wealth effect, Dutch disease cannot be cured by the consumption tax on tourists. In contrast, if tourism tax revenues are used to provide productive government services for the manufacturing sector, Dutch disease can be treated effectively by taxation tailored for tourism. In a normative analysis, we show that to simultaneously correct the distortion caused by the congestion externality of tourism and generate the revenues from overseas tourism taxation, a government should not only levy a general tax on tourism consumption, but it should also discriminate between domestic and overseas tourism consumption, so that a positive tax surcharge is imposed on foreign tourists. In addition, the key factors that govern the optimal rates of a general tax and tax surcharge are also examined in this article.

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Using a dynamic model of an open monetary economy, this paper examines the effects of tourism‐related anticipated shocks on goods prices and foreign exchange reserves. Foreign tourists consume mainly non‐traded goods in holiday destinations, converting them into exportable goods. This gives rise to a tourism terms‐of‐trade effect that affects the accumulation of foreign exchange. Announcements of anticipated events bring tourist visits forward, resulting in an initial under‐adjustment or an over‐adjustment in the prices of the non‐traded goods when the tourism terms‐of‐trade effect is positive or negative. This leads to an increase or a decrease in foreign reserves in the long run.