Price Dynamics, Foreign Exchange and Anticipated Shocks in a Tourism Economy

Abstract

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.

Analyzing the effects of economic factors on modeling the diffusion of foreign exchange earnings from tourism in Taiwan

“…There should be little doubt, for example, that business cycles can influence the development of tourism-linked industries (Chen, 2013, 2013a, 2013b). Meanwhile, Chao et al (2012) mention that political relations between countries may be another sensitive motive, for example, in Taiwan tourists from Mainland China have been a major contributor to the growth of foreign-exchange earnings from US$2,638,000 in 1961 to US$11,769,000,000 in 2012, representing a 4461-fold increase (Figure 1) since 2008, when the Taiwanese and Chinese governments entered into the “Cross-Strait Agreement” signed between the Straits Exchange Foundation and the Association for Relations Across the Taiwan Strait concerning mainland tourists traveling to Taiwan. This agreement, among other accomplishments, enhanced the “foreign-exchange earnings from tourism” -to-gross domestic product (GDP) ratio from 1.48% in 2008 to 2.45% in 2012.…”