Annals of Tourism Research Empirical Insights 4 (2023) 100089

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Annals of Tourism Research Empirical Insights

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

Hongru Zhang a, *, Yang Yang b
a
School of Liberal Arts, Macau University of Science and Technology, Macau 999078, China
b
Department of Tourism and Hospitality Management, Temple University, Philadelphia, PA 19122, USA

A R T I C L E I N F O A B S T R A C T

Editor: Dr. Liu Anyu 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
Keywords: that includes the tourism industry and the housing market. We focus on the recent Icelandic tourism boom, and
Inbound tourism our simulation results suggest a reduction in income inequality and an increase in wealth inequality. Inbound
Income inequality
tourism thus has opposite effects on domestic income inequality and wealth inequality, so the Icelandic gov­
Wealth inequality
ernment faces a trade-off when formulating tourism-related policies to reduce inequalities, and the consequences
Dynamic stochastic general equilibrium (DSGE)
modeling may depend on the type of inequality that policymakers prioritize. Lastly, implications are provided based on
results.

1. Introduction income inequalities in developing economies, in which the tourism

Tourism development has been long regarded as an effective tool for
poverty alleviation and can thus reduce income inequality in a society.
The United Nations World Tourism Organization (UNWTO) has, for
example, recognized the potential of tourism for poverty alleviation as it
develops (UNWTO, 2002). First, natural resources and culture can be the
basis for tourism products and are assets held by many under-developed
regions (Deller, 2010). Second, tourism income can trickle down to
poorer groups in society through the employment of local people in
tourism enterprises or through small community-based enterprises.
Third, tourism can represent a significant source of foreign exchange
earnings and government revenue through taxes, which can be redis­
tributed to alleviate poverty. Issues concerning economic inequality
have increasingly received public and academic attention (Alvaredo,
Chancel, Piketty, Saez, & Zucman, 2018).
Research into tourism economics has typically applied the reduced-
form econometric model to reveal the relationship between tourism
development and income inequality. For example, although Croes and
Vanegas (2008) detected a long-run stable and one-way positive
Granger causal relationship between tourism development and poverty
reduction in Nicaragua, Oviedo-García, González-Rodríguez, and Vega-
Vázquez (2018) concluded that income from tourism failed to reduce
inequality in wealth distribution in the Dominican Republic, and thus
rejected the assumption of poverty alleviation through tourism. Some
studies even find a non-linear relationship between tourism revenue and
inequality nexus is of the Kuznets type (Alam & Paramati, 2016; Uzar &
Eyuboglu, 2019).
In order to shed more lights on the insights of how tourism growth
can reshape the economic inequality, we propose and build a dynamic
stochastic general equilibrium (DSGE) model to capture the channels of
dissemination of how inbound tourism affects income and wealth in­
equalities in a small open economy. Previous studies relied heavily on
reduced-form econometric models. The weakness of the reduced-form
model is that it lacks usefulness in the presence of feedback loops,
especially when rational agents try to reoptimize in response to envi­
ronmental changes like exogenous shocks or policy shifts. Feedback
loops pose difficult endogeneity problems that generally make them
difficult to estimate using reduced-form methods. The structural
approach we use specifies complete models of economic behavior and
estimates or calibrates the primitives of such models, in which we can
simulate the effects of changes in the economic environment on
behavior and welfare if needed. Our DSGE model specifies a system of
equations that are dependent on each other based on rigorous macro-
economic theories. In the model, the economy contains three main
economic decision-makers: foreign tourists, domestic households and
entrepreneurs. Foreign tourists consume a “tourism bundle” consisting
of tourism goods/services (excluding accommodation) and housing,
which are complementary to each other. Households are divided into
two groups according to their skill status. They work, consume, and
reside either in their own properties (skilled) or in rented housing units

* Corresponding author.
E-mail addresses: hrzhang@must.edu.mo (H. Zhang), yangy@temple.edu (Y. Yang).

https://doi.org/10.1016/j.annale.2023.100089
Received 31 December 2021; Received in revised form 29 January 2023; Accepted 9 February 2023
Available online 21 February 2023
2666-9579/© 2023 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-
nc-nd/4.0/).
H. Zhang and Y. Yang
(unskilled). The entrepreneur is the only giant supplier in the economy
and produces both tourism and non-tourism goods while also accumu­
lating real estate and renting it out to both households and tourists. The
model is fully micro-founded with all three decision makers optimized
intertemporally and interacting to reach equilibrium in all markets
when facing a naturally stochastic environment. Income and wealth
inequalities are captured by the wage premium of skilled workers and
the asset/housing value they own, respectively. We use statistical data
from Iceland to parameterize the model, and can thus closely mimic the
real situation. Various types of simulations are conducted to better un­
derstand how a boom in inbound tourism can ultimately contribute to
income and wealth inequalities in society.
This study makes several contributions to the tourism literature.
First, it presents a comprehensive structural investigation of the link
between a tourism boom and income/wealth inequity. Although some of
the factors moderating the tourism-inequity relationship have been
examined, few, if any, studies have constructed rigorous macro-
economic model with solid theoretical foundation. Compared to other
macro-economic models investigating the tourism-inequality nexus,
such as Computable General Equilibrium (CGE) models, the DSGE model
has the advantage of stochasticity, allowing for random variation to
account for uncertainty. Second, instead of only examining income
inequality, we consider both income and wealth inequalities simulta­
neously. This study represents one of the pioneering efforts on looking
into effect of tourism growth on wealth inequality. Finally, we conduct
simulations in which the model economy confronts various stochastic
shocks, including inbound tourism demand, based on a Bayesian esti­
mation of structural parameters. This provides insights into how dis­
turbances in the tourism sector can influence income and wealth
inequalities.1 Thus, we provide empirical evidence of the complex ef­
fects of inbound tourism on inequality, which has policy implications in
terms of leveraging tourism as a strategic tool that can tackle inequality
and enhance the well-being of those involved.
2. Literature review
2.1. Tourism growth and income/wealth inequality
The contribution tourism makes to economic growth and develop­
ment has been investigated in numerous studies (Akkemik, 2012), but
whether tourism-induced growth and development can contribute to
poverty alleviation and the reduction of income inequality has not been
fully assessed (Kinyondo & Pelizzo, 2015). Our study extends the liter­
ature that examines the connection between tourism and inequality.
From a theoretical perspective, tourism development is found to influ­
ence income inequality, and the economic outcomes of tourism activities
can both decrease or increase inequality through different channels
(Njoya and Seetaram, 2018a). Arrangements through which disadvan­
taged groups benefit relatively more from tourism activities can help
reduce income inequality (Blake, 2008). Unemployment is often a factor
that exacerbates income inequality as it both represents a direct loss of
income and deprives people of the means to generate income (Helpman,
Itskhoki, & Redding, 2010). The tourism sector primarily reduces in­
come inequality through the creation of new job opportunities, as more
labor is required if tourism investment and services increase (Garsous,
Corderi, Velasco, & Colombo, 2017). However, the redistributive effect
of tourism may favor the rich, thus leading to further income inequality.
1 ment contribute to economic equity in specific communities in the U.S.
Important types of economic inequality other than the above two are con­
sumption. We refrain from using consumption inequality because it tends to be
dominated by income inequality: the change in income inequality reflects both
transitory and permanent shocks, while the change in consumption inequality
should reflect only permanent shocks (Hall, 1978). We put income and wealth
inequalities as our spotlights to reflect the general picture of economic
inequality.
2
Annals of Tourism Research Empirical Insights 4 (2023) 100089
For example, high-income households in Galicia, Spain were found
through a social accounting matrix model to benefit more from inbound
tourism than low-income households (Carrascal Incera & Fernández,
2015). A Kuznets-type relationship between tourism and income
inequality has also been identified in which tourism may increase in­
come inequality at an early stage of development but significantly
reduce it in later stages (Alam & Paramati, 2016). More recent studies
relate the nexus between tourism and income inequality to countries'
institutional qualities and show the complexities of the relationship
based on various income levels (Nguyen, Schinckus, Su, & Chong, 2021).
Also see J. Zhang (2021) for a meta-analysis of the tourism effects on
income inequality with different econometric tools.
Wealth inequality has also attracted research attention in public
economics. Wealth refers to a stock of valuable possessions, such as a
house or financial assets, while income refers to the flow of money
received, such as wages from employment. The patterns of wealth
inequality are often substantially different from those of income
inequality. Wealth is typically more unequally distributed than income
and creates a larger gap between different economic classes. Inequality
in the redistribution of the wealth generated by tourism can increase
existing inequalities between classes and also divide ethnic groups
(Oviedo-García et al., 2018). In the tourism literature, although several
recent studies recommend the investigation of tourism's impact on
wealth inequality (Gu, Li, Chang, & Guo, 2017; Uzar & Eyuboglu, 2019),
no empirical studies have been conducted so far in this area. Thus, in this
study, we examine the income and wealth inequality together for the
first time in the tourism literature.
2.2. Economic analysis of the tourism-inequality relationship
The effects of tourism growth on income inequality have been
investigated using various empirical methods in tourism economics,
which can be categorized into four groups. Recent studies providing key
empirical evidence are summarized in Table 1. Those in the first group
apply time-series econometrics, such as cointegration and Granger
causality tests, to identify the relationship between tourism develop­
ment and different measures of inequality. For example, Croes and
Vanegas (2008) established long-run stable relationships and Granger
causality among tourism development, economic expansion, and
poverty reduction in Nicaragua, and suggested that public and private
intervention is required in tourism expansion development strategies. A
similar relationship was also found for Malaysia, in which tourism
has a long-run cointegration with income distribution, and lowers in­
come inequality over time (Shahbaz et al., 2019). However, a study of
the Dominican Republic suggested that income from tourism has not
alleviated poverty and has clearly failed to reduce inequality through
the redistribution of wealth (Oviedo-García et al., 2018). A Kuznets
relationship between tourism and income inequality was found for
Turkey, where the expansion of tourism activities initially increases
income inequality and later reduces it, indicating a new strategy that
policymakers can implement to distribute income more equally (Uzar &
Eyuboglu, 2019). However, one disadvantage of Granger causality
analysis is that as it is an atheoretical method based on temporal
ordering, and structural notions of causality are not considered (Hoover,
2017).
Studies in the second group apply panel data econometric modeling
to establish the relationship between tourism and inequalities. Lee and
O'Leary (2008) focused on economic equity in tourism- and recreation-
dependent communities to assess how tourism and recreation develop­
They found that development contributed to increased income
inequality, unlike manufacturing-related development, which is likely
to reduce it. Kim et al. (2016) used panel data from 69 countries and
found that tourism expenditure had an insignificant effect on poverty
reduction in general, but that the pure effect of tourism on the poverty
ratio depends on a country's economic development. This finding is
H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

Table 1 supported by the study of Mahadevan and Suardi (2017), based on 13

Recent key empirical studies on the impact of tourism on poverty and income tourism-intensive economies, which found little evidence to suggest that
inequality. growth in tourism reduces headcount poverty. Their results were robust
Empirical Studies Data Findings to different specifications of the Gini coefficient. Positive results in the
methods literature include the findings of Zhao and Xia (2019), who indicated
Cointegration/ Croes and Vanegas Nicaragua Tourism granger that tourism has a positive effect on poverty reduction in western
Granger (2008) 1980–2004 causes poverty provinces of China, where the relationship between the two is close, thus
causality reduction reflecting the Chinese pro-poverty tourism policy. Despite the mixed
Oviedo-García et al. Dominican Tourism fails to
findings, Kuznets-type relationships between tourism and income
(2018) Republic reduce wealth
2000–2013 inequality inequality have been confirmed for 49 developing economies, indicating
Shahbaz, Solarin, Malaysia Tourism lowers that tourism development increases income inequality until a specific
Azam, and Tiwari 1991–2017 income inequality threshold is reached, and then decreases it (Alam & Paramati, 2016).
(2019) Thus, the tourism-inequality relationship has been established and its
Uzar and Eyuboglu Turkey Tourism-related
(2019) 1974–2015 Kuznets curve valid
moderators after controlling for other variables identified, but the
Panel Lee and O'Leary Selected areas Tourism raises reduced-form equation used does not provide meaningful insights into
econometric (2008) in US income inequality the relationship based on structural analysis that is invariant to policy
model 1990–2000 changes.
Vanegas (2014) Five Central Tourism matters for
Studies in the third group apply social accounting matrices (SAM),
American poverty reduction
countries which capture the various distributional effects of tourism through the
1980–2012 backward and forward links of tourism activities with the rest of the
Alam and Paramati 49 developing Kuznets type economy (Carrascal Incera & Fernández, 2015). Blake (2008), for
(2016) economies relationship example, examined the effects of tourism-related industries and other
1991–2012 between tourism
export industries on households in East Africa and found that the former
and income
inequality provide substantially less income to poorer households than the latter.
Kim, Song, and 69 developing Tourism industry This leads to the concern that tourism expansion may not help alleviate
Pyun (2016) countries reduces poverty poverty in these countries. Saayman et al. (2012) confirmed the findings
1995–2012 ratios only in the
of Blake (2008) in the context of South Africa, finding that the poor
least developed
countries benefit very little in the short term from additional tourism income.
Li, Chen, Li, and 30 provinces in Tourism reduces Tourism receipts can be used as strategic tools to alleviate poverty
Goh (2016) China regional income through policies that focus on the labor market and human resource
1997–2010 inequality development (Muchapondwa & Stage, 2013). Croes and Rivera (2016b)
Mahadevan and 13 tourism- Tourism doesn't
examined the distributional effects of tourism expansion by applying a
Suardi (2017) intensive reduce income
economies inequality SAM model to Ecuador and found that tourism has a large multiplier
1995–2012 effect on the economy and can potentially benefit the poor substantially.
Zhao and Xia Chinese Tourism has a Wealth is spread across all households in urban and rural areas and
(2019) provinces positive effect on
benefits the least wealthy households the most.
1999–2014 poverty reduction
Nguyen et al. 97 countries Tourism has mixed
Studies in the last group extend the SAM analysis by applying a
(2021) 2002–2014 effects on income computable general equilibrium (CGE) model to examine the economic
inequality and distributional impacts of tourism activities. Various parameters in
Social Blake (2008) Kenya 2003, Tourism is not pro- the model are calibrated using SAM. Blake et al. (2008) developed a CGE
accounting Tanzania 2001 poor
model that considers both the impact of tourism expansion and the
matrix Uganda 1992
Saayman, Rossouw, South Africa Tourism is not pro- distributional effects among rich and poor households in the Brazilian
and Krugell (2012) 2004 poor economy. They show that the effects on all income groups are positive,
Klytchnikova and Panama 2008 Tourism is pro-poor but the lowest income households benefit less than those in higher-
Dorosh (2013)
income groups. Poverty relief can only be effective if governmental
Muchapondwa and Botswana Tourism is not pro-
Stage (2013) 1996–1997, poor
policies that can redistribute greater shares of the revenue to the poor
Namibia 2004 are considered. Similarly, in Thailand, increased inbound tourism de­
South Africa mand raises aggregate household income but worsens its distribution
2005 (Wattanakuljarus & Coxhead, 2008), because the general equilibrium
Carrascal Incera Galicia in Spain Tourism is not pro-
effects of tourism expansion undermine the profitability of other trad­
and Fernández 2008 poor
(2015) able sectors, which generate a substantial proportion of the incomes of
Croes and Rivera Ecuador 2008 Tourism is pro-poor those in poverty. The finding that poverty reductions are accompanied
(2016a) by increases in income inequality illustrates the difficulty of this trade-
CGE model Blake, Arbache, Brazil 2002 Tourism is not pro- off from a tourism boost poses. A CGE study of domestic and foreign
Sinclair, and Teles poor
(2008)
tourism in Indonesia also identified this trade-off, as policies such as
Wattanakuljarus Thailand Tourism is not pro- investments in tourism-related sectors aimed at increasing labor pro­
and Coxhead poor ductivity are required to address both poverty and income inequality
(2008) (Mahadevan et al., 2016). Njoya & Seetaram, 2018b), however, provide
Banerjee, Cicowiez, Haiti 2012/ Tourism reduces
contrasting findings in their study of Kenya, in which they used a CGE
and Gachot (2015) 2013 poverty
Mahadevan, Amir, Indonesia Tourism is not pro- model to investigate whether tourism development can provide a route
and Nugroho poor to poverty reduction. They demonstrated that the effects of tourism
(2016) expansion on the poverty gap and poverty severity are significant in
Njoya and Seetaram Kenya Tourism is pro-poor both rural and urban areas, indicating that poor households can move up
(2018a)
closer to the poverty line after tourism expansion. Banerjee et al. (2015)
also applied a CGE model to Haiti and indicated that tourism has a
positive impact on sectoral activity, particularly in the hotel and

3
H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

restaurant sector. Tourism investment helped some of the region's 2.15

poorest people, thus significantly reducing the poverty headcount.
However, one drawback of CGE modeling is the lack of stochasticity, 32
2.10

which prevents the estimation and the fitting of the model to time series
2.05
data. Although an econometric estimation of CGE models has been
suggested, insufficient data are typically available for the estimation of 30
2.00
large complex equation systems with deep parameters, thus leading to
the routine use of calibration (Rickman, 2010). 28
1.95

2.3. Macro-economic modeling of tourism 1.90

26
1.85
Rooted in the concept of the “multiplier effect,” the macro-economic
modeling efforts help understand how tourism is interrelated with other
24
parts of the economy. Different macro-economic models have been 2002 2004 2006 2008 2010 2012 2014 2016 2018
introduced in tourism economics. The input-output (I-O) analysis ex­
amines the inter-sectoral relationship between different components of Gini index
Wage premium of tertiary education and above
the economy by analyzing the flows of products across different sectors,
and it evaluates the direct, indirect and induced impacts of tourism
(a)
(Yang, Fik, & Altschuler, 2018). A more complicated model, the
computable general equilibrium (CGE) method, which encompasses .7 .18
multiple equations, was applied in tourism economics to depict the
behavior of consumers and producers under the principles of micro­ .6 .16
economic optimization (Pratt, 2011). A further extension to CGE is the
dynamic CGE model that includes a time dimension to capture various .5 .14

types of economic dynamics in the model (Njoya & Seetaram, 2018a).

Unlike CGE providing the estimates based on the entire economy, the
.4 .12

tourism satellite accounts (TSA) method was developed to provide the .3 .10
estimates at the industry level with standardized databases related to the
tourism industry (Dwyer, Forsyth, & Spurr, 2007). TSA became partic­ .2 .08
ularly popular to generate a series of official tourism statistics to
monitor, manage, and project tourism and related activities. .1 .06
To date, only a few papers have explored tourism issues within the
DSGE framework. Liu, Song, and Blake (2018) proposed a DSGE model .0 .04
2002 2004 2006 2008 2010 2012 2014 2016 2018
estimated by a Bayesian approach to explore the relationship between
tourism development and economic growth. H. Zhang and Yang (2019) Real housing prices
adopted a small open economy DSGE framework to investigate the Inbound tourism expenditure to GDP ratio

impact of an inbound tourism boom on Dutch disease and the welfare
consequences on the hosting economy. Liu and Wu (2019) constructed a
Bayesian DSGE endogenous growth model to investigate the association
between tourism productivity and economic growth. Results recognized
spillover effects from tourism owing to physical and human capital ex­
ternalities and public services. Likewise, Inchausti-Sintes and Pérez-
Granja (2020) applied a Bayesian DSGE model to evaluate the impact of
monetary policy and exchange rate on tourism demand, and the model
unveiled the optimal response to tourism across four different monetary
policies. In a more recent paper, Yang, Zhang, and Chen (2020) devel­
oped a DSGE model to understand how the COVID-19 pandemic affects
tourism, and the results show that the tourism voucher policy helps
alleviate the negative impact from the pandemics.
2.3.1. Tourism development in Iceland
We select Iceland as our case in this study for our model setup and
parameter estimation, although our DSGE model is generalizable to any
small open economy. Iceland has a significant tourism sector and has
experienced particular events over the past decade that distinguish it
from other Scandinavian countries. The financial collapse of 2008
reversed the downward trend of income inequality that had occurred
from the late 1990s to 2007. In the last few years, signs of improvement
have been seen, as the Gini index has gradually lowered from a peak of
29.6% in 2008 to 24.1% in 2016, and the wage premium of tertiary
education and above shows a similar pattern (see Fig. 1-a). The dy­
namics of income inequality in Iceland do not follow the general pattern
of other Scandinavian countries, as the Gini indices in Denmark,
Finland, Norway, and Sweden increase, or at least do not decline, after
2008 (Pareliussen, Hermansen, Andre, & Causa, 2018, p. page 21).
Wealth inequality continues to grow in Iceland, and in 2016 the
(b)
Fig. 1. Historical pattern of inequality and tourism measures in Iceland.
wealthiest 5% of the country owned 43.5%, and the wealthiest 1%
owned 19.2% of all available assets (Grapevine, 2018). This trend is
consistent with the other Scandinavian countries (Bird, 2014). Fig. 1-b
plots the Icelandic house price index between 2002 and 2018. We focus
on the housing price index because the inequality in net housing wealth
and in net wealth are highly correlated across OECD countries (Causa,
Woloszko, & Leite, 2019). Meanwhile, the increase in the housing price
after 2010 arguably contributed to the increase in wealth inequality in
Western European countries (Fuller, Johnston, & Regan, 2019). Ice­
land's circumstances are unique, as the reduction in income inequality is
accompanied by an increase in wealth inequality, which poses research
challenges. We aim to reconcile these two issues in this study.
The recent Icelandic tourism boom can help to explain the changes in
inequality. The tourism boom pushes up the housing price (benefiting
the wealthier) while reducing the wage premium of skilled labor
(benefiting the poorer). Increasing house prices enlarges the net worth
of the rich, and raising the living cost of the poor reduces the net worth
of the poor, leading to more severe wealth inequality. Wage premium is
the average wage difference between high-skilled and low-skilled
workers. Therefore, if anything can help reduce the wage premium
actually narrows down the income gap between the two group and
benefit the lower class. Thus, we investigate the relationship between
inbound tourism and economic inequality (income and wealth) during
the recent boom in Icelandic tourism. Tourist numbers have increased
on average by >20% annually since 2010, and the number of foreign

4
H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

visitors more than quadrupled between 2010 and 2017, reaching 2.2 subject to the budget constraint
million. Fig. 1-b also plots the ratio of inbound tourism expenditure to
GDP in Iceland between 2003 and 2018, which provide good indications
F
pT,t CT,t + rH,t HtF = YtF (2)
of the importance of inbound tourism to the Icelandic economy. The
growth rates of both these factors were relatively flat before the financial where βF is the foreign tourists' subjective discount factor. ω determines
crisis and have risen rapidly since 2010/2011, coinciding with the the share of tourism consumption in the bundle, and υ is the inverse of
reduction of income inequality (measured by GINI index or wage pre­ the elasticity of substitution between goods and accommodation of
mium) and increase in wealth inequality (proxied by real housing price). tourism expenditure in the bundle. In addition, pT, t is the (relative) price
Different from the other four Nordic countries, Iceland is the only one to of tourism goods and rH, t is the (real) rent of accommodation. We further
have experienced a surge in inbound tourism and an improvement in assume that CFT, t and HFt are complementary to each other. Foreign
income inequality over the last decade. Tourism has boosted the econ­ tourists select optimal CFT, t and HFt to maximize eq. (1) subject to eq. (2).
omy and alleviated some of the effects of the financial crisis. The
question we address is whether inbound tourism in Iceland, while easing 3.2. High-skilled workers
the problems caused by the financial crisis, also contributes to the recent
dynamics of income/wealth inequality? The economy is inhabited by two types of infinitely lived workers.
High-skilled workers (HSWs) derive utility from consumption CH t ,
3. The model housing HH H
t , and leisure (disutility of working Nt ). Their consumption
consists of tourism goods CH T, t and non-tourism manufacturing goods CM,
H
A small open economy DSGE model is developed in this study, and it t , aggregated by CES functions. In the real estate market, we assume
includes a tourism goods sector and a housing market. The model also that HSWs own houses HH t and are owner-occupied residents. In the
allows for household heterogeneity and capital-skill complementarity in labor market, HSWs only supply hours to manufacturing firms. Their
production (Lindquist, 2004). The two types of domestic households are utility maximization problem is given by
high-skilled workers NH, t and low-skilled workers NL, t, the two types of ( ( H )1+η )
∑ ∞
( H )t N
final goods provided are tourism goods (excluding accommodation) YT, V H = E0 β lnCtH + jt lnHtH − μH t
1+η
t, and generic manufacturing goods, YM, t. Tourism goods are produced t=0

by combining low-skilled workers with capital, whereas manufacturing

[ ( )1− ζ ]1−1 ζ
goods also require additional high-skilled workers. Skilled technical )1− ζ (
CtH = φ CT,t
H H
+ (1 − φ) CM,t (3)
ability is complementary to capital such as high-tech equipment (Kru­
sell, Ohanian, Rios-Rull, & Violante, 2000). The housing market is
divided into an owner-occupied part and a rental part that serves tourists where βH is their subjective discount factor, jt captures the stochastic
from other countries as well as domestic households. housing preference shock, and η measures the Frisch elasticity of the
The multiple groups of decision-makers in the model economy are labor supply (Frisch, 1959). For the consumption bundle, φ determines
inbound tourists, domestic households consisting of high-skilled and the share of tourism goods and ζ is the inverse of the elasticity of sub­
low-skilled workers, as well as entrepreneurs. Foreign tourists make stitution between tourism goods and manufacturing goods. The inter­
optimal decisions between tourism goods and accommodation under a temporal budget constraint is given by
budget constraint. The utility of domestic households comes from con­ ( )
H
pT,t CT,t H
+ CM,t + qt HtH − Ht−H 1 + Bt = wHt NtH + rB,t− 1 Bt− 1 (4)
sumption, housing services, and leisure time (disutility from working).
High-skilled workers consume a composite of tourism and
where qt is the real housing price, Bt is the debt from entrepreneurs with
manufacturing goods and own houses, whereas low-skilled workers
a return rate of rB, t, wH t is the real wage for the HSWs in the
purchase manufacturing goods only and obtain housing services through
manufacturing sector. HSWs select CH H H H
T, t, CM, t, Ht , Nt and Bt to maximize
renting (instead of buying). The labor supply goes to both the tourism
eq. (3), subject to eq. (4).
and manufacturing sectors, and low-skilled workers work in both sec­
tors, and high-skilled workers work in the manufacturing sector only. As
3.3. Low-skilled workers
the delegated supplier in the economy, entrepreneurs produce both
tourism and manufacturing goods, participating real estate activities
To distinguish low-skilled workers (LSWs) from HSWs, we make the
(including renting houses/properties to tourists). All four decision
following assumptions. First, LSWs work in both the tourism and
makers maximize their objective functions under their budget con­
manufacturing sectors, and it is frictionless for them to switch between
straints, and the details of the optimization problems are defined in the
sectors. Second, LSWs do not own housing properties or hold the debts of
following sub-sections.
entrepreneurs. Third, LSWs only consume generic goods. In our model
LSWs appear to be like rule-of-thumb consumers who do not have access
3.1. Foreign tourists to credit markets supporting intertemporal choices (Gali, Valles, &
Lopez-Salido, 2007). LSWs also derive utility from consumption CLt ,
Foreign tourists derive utility from consuming a bundle of tourism- housing HLt , and leisure (disutility of working NLt ), and the utility
related goods and services in Iceland subject spending budget YFt , maximization problem is given by
determined exogenously and stochastically as Webber (2001) noted. The ( ( L )1+η )
bundle CFt includes the accommodation. ∑ ∞
( L )t H Nt
L L L
lnCt + jt lnHt − μ (5)
HFt and the tourism-related consumption CFT, t, including trans­
V = E0 β
t=0
1+η
portation, dining, and entertainment, etc. The utility maximization
problem is specified as follows: where βL is the subjective discount factor of LSWs. The budget constraint
∑
∞
( )t ( ) is given by
V F = E0 βF lnCtF
t=0 CtL + rH,t HtL = wLt NT,t
L
+ wLt NM,t
L
(6)

[ ( )1− υ ]1
( )1− υ 1− υ where NLt = NLT, t + NLM, t indicates that LSWs can switch between the
CtF = ω CT,t
F
+ (1 − ω) HtF (1) tourism and manufacturing sectors without friction, and wLt is the real
wage for LSWs. They select CLt , HLt , NLT, t and NLM, t to maximize eq. (5),

5
H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

subject to eq. (6). raise the skill premium, or the capital-skill complementarity effect (Krusell
et al., 2000).

3.4. Entrepreneurs
3.5. Market-clearing conditions
The group of entrepreneurs can be treated as part of big families of
HSWs. They are delegates of the big families to run the supply side of the Lastly, the tourism, manufacturing and the housing markets clear
economy. They accumulate capital KT, t, KM, t, and housing, HEt . They with the following conditions
produce tourism goods YT, t and manufacturing goods YM, t, by hiring
labor of HSWs NH L
H F
(14)
t and LSWs Nt . They also provide rental services to
YT,t = CT,t + CT,t
LSWs and foreign tourists. Their intertemporal objective function is:
YM,t + YtF = CM,t
H
+ CtL + CtE + Kt+1 − (1 − δ)Kt (15)
∑
∞
( )( )
E
V = E0 β E t
lnCtE (7)
t=0 H = HtH + HtL + HtF (16)

where βE is the entrepreneurs' subjective discount factor and CEt their

4. Empirical strategies
consumption of generic goods. We suppose entrepreneurs not
consuming tourism goods and optimize subject to the following
4.1. Model calibration
constraint:

pT,t YT,t + YM,t + rH,t HtE + Bt = CtE + rB,t− 1 Bt− 1 + wHt NtH + wLt NtL We collected the four major economic indicators in Iceland between
2002 and 2018 from Statistics Iceland, and they are real consumption,
( )
+ qt HtE − Ht−E 1 + KT,t+1 − (1 − δT )KT,t + KM,t+1 − (1 − δM )KM,t (8) real investment, the real housing price, and the average wage premium.
We do not use the GDP series because government spending is absent
where δT and δM are the rates of depreciation in capital used in tourism from the model. All data were log-linearized and HP-filtered in the
and manufacturing production, respectively. In addition to the flow of timeseries (Hodrick & Prescott, 1997). The calibration procedure starts
funds constraint, the entrepreneur is also restricted by the following with assigning values to major parameters of the DSGE model. Two
borrowing constraint: methods were used: (1) empirical evidence and theoretical suggestions
( ) from previous studies and (2) first moment indicating the stylized facts
HE
Bt ≤ mt Et qt+1 t (9) of long-term steady state based on data (Gomme & Rupert, 2007). We
rB,t
calibrate the model parameters based on annual data set from Iceland
over approximately the past decade. A Bayesian estimation was used for
where mt represents the loan-to-value ratio. Entrepreneurs are endowed
the remaining parameters.
with production technologies in the two sectors. The production func­
The model is specified on yearly basis. We set δT = 0.2, and δM = 0.1
tion for tourism goods is given in standard Cobb-Douglas fashion:
to reflect the intensive utilization of facilities in tourism-related activ­
( )αT (
L
YT,t = AT,t NT,t KT,t
)1− αT
(10) ities in busy seasons (Turner & Hesford, 2018). The labor share in the
tourism sector is set αT = 0.7. The manufacturing sector hires both HSWs
and LSWs, so the labor share should account for them together. We set
where AT, t measures the stochastic productivity shocks to the tourism
αM = 0.3, and π = 0.5, and the latter two numbers imply that the labor
production and αT captures the labor income share. The production
share in the manufacturing sector is αM + (1 − αM)π = 0.65. These two
function for generic goods features the skill-capital complementarity, in
values, 0.7 and 0.65, are plausible because they straddle the aggregate
which growth in the stock of capital such as equipment increases the
labor share of 0.67 in Seneca (2010). Tables 2 summarizes the calibrated
marginal product of skilled labor, but decreases the marginal product of
parameters and the steady-state ratios of the model.
unskilled labor. Specifically,
( )αM [ ( )1− γ ( )1− γ ]1−1−αMγ
L
YM,t = AM,t NM,t ϕ KM,t + (1 − ϕ) NtH (11) 4.2. Bayesian estimation

where AM, t measures the stochastic productivity shocks in the generic As mentioned earlier, the Bayesian method is embraced to estimate
sector and αM and ϕ are share parameters. The elasticity between NLM, t parameters that have not been covered by previous empirical studies
and NH L
t , and between NM, t and KM, t is one, as in Cobb-Douglas fashion, (An & Schorfheide, 2007).
whereas that between NH t and KM, t is less than Specifically, to generate the posterior mode in this estimation, we
one− complementarity− measured by 1/γ. In this setup, the skill/wage used the Monte Carlo-based optimization routine with Metropolis-
premium wpt is connected to the factor inputs as follows: Hasting algorithms. During the estimation, 20,000 draws in each of
[ ( )1− γ ]− 1
L
two Markov chains were used to simulate the parameters' posterior
wH 1 − αM NM,t
wpt = tL =
ϕ KM,t
+ 1 (12) distribution. Fig. 2 illustrates the multivariate convergence diagnostic
wt αM 1 − ϕ NtH NtH test, which reflects the reliability of the estimation results (Brooks &
Gelman, 1998). The acceptance ratios of the two chains are 0.676 and
To illustrate the implications of this expression for the skill premium,
0.666, respectively, which are acceptable as they are not close to 0 or 1
we log-linearize it, and it yields
(Herbst & Schorfheide, 2016).
( )
(
1 − αM
) L
NM,t ϕ
(
KM,t
)1− γ The parameters requiring Bayesian estimation include (1) the inverse
lnwpt ≃ ln + ln − (13) of foreign tourists' elasticity of substitution between tourism consump­
αM NtH 1 − ϕ Nt H
tion and accommodation υ; (2) the inverse of the elasticity of substitu­
We find that an increase in the ratio of low-skilled to high-skilled tion of HSWs between tourism and non-tourism goods ζ; and (3) the
labor in the manufacturing sector will ceteris paribus raise the skill pre­ inverse of the elasticity of substitution between capital and HSWs labor
mium, or the relative supply effect, which is relatively intuitive. We also in the manufacturing production function γ. The parameters of first-
see that when γ > 1, indicating that KM, t and NH t are complementary, a order autoregressive coefficients ρf, ρT, ρM, ρm, and ρj, and standard
rise in the stock of capital relative to high-skilled labor will ceteris paribus deviations σf, σ T, σ M, σ m, and σj, specified as follows:

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H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

( )
Table 2 lnYtF = ρf lnYt−F 1 + ef ,t ef ,t ∼ N 0, σ2f
Calibrated parameters and steady-state ratios.
Parameter Description Value Source ( )
lnAT,t = ρT lnAT,t− 1 + eT,t eT,t ∼ N 0, σ2T
β Workers' discount factor 0.966 Seneca (2010)
βE Entrepreneurs' discount 0.932 Iacoviello and Neri (2010) ( )
lnAM,t = ρM lnAM,t− 1 + eM,t eM,t ∼ N 0, σ 2M
factor
j Weight on housing 0.71 Iacoviello and Neri (2010) ( )
and the authors' calculation lnmt = ρm lnmt− 1 + em,t em,t ∼ N 0, σ 2m
η Inverse of Frisch elasticity of 3 Seneca (2010)
labor supply
( )
m Entrepreneurial loan-to- 0.7 Elíasson and Pétursson lnjt = ρj lnjt− 1 + ej,t ej,t ∼ N 0, σ2j
value ratio (2009)
αT Labor share in tourism 0.7 Seneca (2010) and the In terms of the prior means, capital-skill complementarity implies the
production authors' calculation elasticity of substitution between HSWs, and capital in the
αM LSW share in manufacturing 0.3 Seneca (2010) and the manufacturing production function is less than one. Complementarity is
production authors' calculation
also applicable to foreign tourists, between tourism consumption and
π HSW share in skill capital 0.5 Seneca (2010) and the
composite authors' calculation accommodation. Thus, we set the prior means for both γ and υ to 2. We
δT Tourism capital depreciation 0.2 Seneca (2010) and the establish households' elasticity of substitution between tourism and
rate authors' calculation manufacturing goods based on the statistical data on the share of Ice­
Manufacturing capital 0.1 Seneca (2010) and the
δT
landers' tourism consumption and their price elasticity of tourism de­
depreciation rate authors' calculation
mand (Song, Kim, & Yang, 2010). Thus, we set the prior means for ζ to
0.5. For shock processes, we use standard prior means for the first-order
Variable
autoregressive coefficient and standard deviations for innovations (Sun
YF/Y Inbound tourism 11.8% Statistics Iceland
expenditure output ratio & Tsang, 2017). Table 3 provides the prior distributions of these pa­
pTYT/Y Tourism production output 17.7% Statistics Iceland rameters and shock processes used in DSGE modeling.
ratio The right panels of Table 3 report the posterior mean and 90%
C/Y Consumption output ratio 68.1% Statistics Iceland probability intervals. The posterior mean of γ is 2.25, implying that
NT/N Tourism share of 11.0% Statistics Iceland
employment
capital and HSW are indeed complementary in producing
p TC H
T /C Domestic tourism 8.7% Statistics Iceland manufacturing goods. Similarly, the posterior mean of υ is 1.92. This
expenditure consumption value confirms the complementarity between tourism consumption and
ratio accommodation for foreign tourists. The posterior mean of ζ is 0.7,
IT/I Share of investment in 19.5% WTTC T&T Iceland
demonstrating moderate substitution between tourism and
tourism sector
rHHFR/YF Share of accom expenditure 21.1% Statistics Iceland manufacturing consumption for HSWs. All shocks are relatively persis­
for inbound tourists tent and the resulting posteriors are close to their priors. The innovations
HH
P /H Home ownership rate 80% Statistics Iceland of the inbound tourism demand shock and the domestic house prefer­
ence shock are extremely volatile.

Fig. 2. Multivariate convergence diagnostic test of the model.

7
H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

Table 3
Prior and posterior distribution for Bayesian estimation.
Prior and posterior distribution of the structural parameters

Prior distribution Posterior distribution

Parameter Distribution Mean SD Mean 10% 90%

υ Gamma 2 0.4 2.2552 1.6052 2.8572

γ Gamma 2 0.4 1.9165 1.2740 2.5135
ζ Beta 0.5 0.1 0.7046 0.5308 0.8933

Prior and posterior distribution of the shock processes

ρf Beta 0.8 0.2 0.7936 0.6523 0.9469
ρT Beta 0.8 0.2 0.6957 0.5483 0.8463
ρM Beta 0.8 0.2 0.7274 0.5973 0.8851
ρm Beta 0.8 0.2 0.6964 0.5376 0.8429
ρj Beta 0.8 0.2 0.8241 0.7084 0.9266
σf Inv. Gamma 0.1 0.02 0.3241 0.2124 0.4361
σT Inv. Gamma 0.1 0.02 0.0644 0.0333 0.0986
σM Inv. Gamma 0.1 0.02 0.0748 0.0543 0.0962
σm Inv. Gamma 0.1 0.02 0.1213 0.0774 0.1639
σj Inv. Gamma 0.1 0.02 0.2666 0.1857 0.3564

5. Model results
5.1. Impulse responses
We are interested in understanding tourism's impact on the fluctu­
ation in the wage premium (as the proxy for income inequality) and the
housing price in Iceland (as the proxy for wealth inequality). We first use
impulse response functions (IRFs) to illustrate how the shocks to in­
bound tourism demand and tourism productivity explain the wage
premium and housing price dynamics (Cogley & Nason, 1995). Fig. 3
displays the IRFs to the inbound tourism demand shock. The boom in the
tourism sector attracts resources from the manufacturing sector, so that
labor is reallocated to the tourism sector and low-skilled wages become
higher in both sectors. Higher skilled wages initially decline, but
demonstrate persistence in line with the movement of manufacturing
capital, due to complementarity. Thus, the wage premium drops, which
is also reflected in the relative supply effect of labor and the capital-skill
complementarity effect in the manufacturing sector. The boom in the
rental market has prompted entrepreneurs to accumulate more housing
stock for rent, reducing the supply of owner-occupied housing and
pushing up prices. We observe a decline in the wage premium (proxy of
income inequality) and a rise in housing value (proxy of wealth
inequality) conditional on the inbound tourism demand boom. Given
the continuous growth in inbound tourism, the simultaneous improve­
ment of income inequality and the deterioration of wealth inequality in
Iceland over the past decade is not surprising.
Productivity analysis is essential for evaluating tourism sustainabil­
ity and reshaping tourism activities, as there is a direct link between
productivity and the tourism industry's competitiveness and profit­
ability (Assaf & Tsionas, 2018). We also examine how tourism sector
productivity shapes the dynamics of income and wealth inequality in
our model, and Fig. 4 plots the IRFs of a positive tourism sector pro­
ductivity shock resulting from more efficient accommodation and food
serving standards, travel and reservation activities, and transport ser­
vices. Higher productivity in the tourism sector directly increases
tourism production and low skilled wages in the sector. Like the inbound
tourism demand shock, the tourism boom leads to resource reallocation
from the manufacturing sector to the tourism sector. This is confirmed
by the relative supply effect and capital-skill complementarity effect,
and
the wage premium (proxy of income inequality) also declines. The
housing price (proxy for the wealth inequality) increases along with the
rental price, although the effects are indirect. The low wage premium
that goes along with the high housing value is also observed to be
conditional on a positive productivity shock in the tourism sector,
although the effect is quantitatively weaker. A tourism boom from the
supply side therefore, also contributes to the simultaneous improvement
in income inequality and deterioration of wealth inequality in Iceland.
Due to space limitations, the IRFs for the remaining structural shocks in
the model are presented in the supplementary material section.
5.2. Variance decomposition
Variance decomposition enables the evaluation of the proportion of a
variable's forecast error variance that can be attributed to random in­
novations in the system (Torraleja, Vázquez, & Franco, 2009). We use
the unconditional forecast error variance decomposition to demonstrate
how different types of shocks influence the volatility of the wage pre­
mium (proxy of income inequality), housing value (proxy of wealth
inequality), and the general economy. We focus mainly on six variables
of interest— two price variables of wage premium and the real housing
price, four quantity variables of tourism output, manufacturing output,
consumption, and investment. The remainder are available upon
request. Table 4 presents the results of the variance decomposition. For
the wage premium, which represents income inequality in our model,
the main driving force is the inbound tourism demand shock, which
accounts for over 56% of the variance; housing preference ranks second
with 20%; tourism and manufacturing productivity shocks account for
10% and 11%, respectively; and the LTV ratio shock has only a minor
role. The other variable of interest, the wealth inequality (proxied by the
real housing price), is mainly driven by the housing preference shock,
which accounts for 45% of the variance. The inbound tourism demand
shock is also significant and accounts for 17% of the variance. However,
it ranks behind the manufacturing productivity shock with 21% of the
variance, and ahead of the LTV ratio shock with 16%. Thus, inbound
tourism demand shock plays a major role in determining the uncondi­
tional variance of both the wage premium and the housing price, while
only the tourism productivity shock affects the variance in the wage
premium significantly. Thus, tourism factors, both in terms of foreign
demand and domestic supply, account for much of the variance in in­
come inequality, whereas only inbound tourism demand significantly
determines the variance in wealth inequality.
5.3. Historical decomposition
Fig. 5 shows the historical contribution of each structural shock to
the variability of selected endogenous variables (Hasumi, Iiboshi, &
Nakamura, 2018). As panel (a) shows, the inbound tourism demand
shock is the primary driving force of the fluctuations in the wage pre­
mium. Housing preference shock also has a significant role, but only in

8
H. Zhang and Y. Yang
Fig. 3. Impulse responses to the inbound tourism demand shock.
Note: The y-axis measures the percent deviation from the steady state. The thick lines represent the estimated responses and shaded areas demarcate the 90%
confidence intervals.
the first half of the sample. Panel (b) demonstrates that house preference
represents the most important factor shaping the housing price fluctu­
ation, followed by the shock to inbound tourism demand, along with the
manufacturing productivity and LTV ratio shocks. This confirms the
earlier results of the variance decomposition. Panel (c) and (d) show that
consumption and investment shocks are largely associated with the
manufacturing productivity shock, while the inbound tourism demand
shock also plays a significant role in the dynamics of investment. The
results together demonstrate that the inbound tourism demand shock
explains a.
considerable amount of the variations in wage premium in Iceland.
This again confirms the major role of inbound tourism demand in
shaping the dynamics of income and wealth inequalities.
9
Annals of Tourism Research Empirical Insights 4 (2023) 100089
6. Conclusion
The tourism-inequality nexus has been investigated extensively in
the literature, but the inequalities in income and wealth have rarely
been examined together. Most of the research is based on either the
hedonic method or the traditional reduced-form econometric model,
with inequality being a function of tourism, and largely overlooks the
dynamics of the tourism-inequality relationship from a broader sto­
chastic environment. The ongoing division between income inequality
and wealth inequality in Iceland provides an ideal scenario for our
study, and the dynamics of the inequalities are accompanied by an influx
of visitors, which motivates our exploration of the dynamic relationship
between inbound tourism and the two types of inequalities in Iceland.
We investigate this relationship within a DSGE framework.
From theoretical perspective, our model can reconcile the division
H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

Fig. 4. Impulse responses to the tourism productivity shock.

Table 4
Variance decomposition of the forecast errors (in %).
Variables σf σT σM σm σj
Inbound tourism demand shock Tourism productivity shock Manufacturing productivity shock L.T.V shock Housing preference shock

Wage premium 56.23 10.03 11.39 2.05 20.30

House price 17.29 0.84 21.26 15.86 44.75
Tourism production 32.26 32.76 34.16 0.52 0.31
Manufacturing production 2.01 0.31 94.75 0.60 2.34
Consumption 6.87 0.36 85.98 2.30 4.48
Investment 14.14 1.51 58.48 8.63 17.24

between income inequality and wealth inequality by driving the de­
parture between wage premium (proxy of income inequality) and
housing prices (proxy of wealth inequality) conditioning on inbound
tourism demand shift. We then utilize the model by using Bayesian
econometrics and conduct several simulations to understand the impact
of inbound tourism shocks on the dynamics of the Icelandic wage pre­
mium, housing price, and the total economy. The impulse response
function demonstrates that the wage premium declines while the
housing price increases after a positive inbound tourism demand shock.
Higher demand by inbound tourists creates a higher demand for low-

10
H. Zhang and Y. Yang Annals of Tourism Research Empirical Insights 4 (2023) 100089

Fig. 5. Historical decomposition of key variables.

Note: The solid lines plot model variables, expressed in percentage deviation from their steady-state values. The bars show the contributions of the estimated
structural shocks.

11
H. Zhang and Y. Yang
skilled workers, leading to low-skilled workers moving from the
manufacturing sector to the tourism sector, and an increase in their
relative wages. Capital-skill complementarity in the manufacturing
sector then pushes down high-skilled wages. Both reduce the wage
premium and thus income inequality. The increase in inbound tourism
increases the consumption of tourism goods and complementary ac­
commodation, leading to a boom in rentals. Higher rentals further result
in more real estate purchases by entrepreneurs, pushing up the housing
price, and thus the wealth inequality. The variance decomposition and
historical shock decomposition show that the shock in inbound tourism
demand is the key driving force of the fluctuations in the Icelandic wage
premium, whereas the housing preference shock plays the most signif­
icant role in determining the house price volatility. The estimated in­
bound tourism demand shock thus explains much of the variation in the
wage premium, housing price, and macro indicators such as consump­
tion and investment in Iceland. The dynamics of both income and wealth
inequalities are well accounted for by this shock.
In terms of policy implications, any disruptions to the tourism in­
dustry could easily spill over to other sectors as highlighted in our DSGE
model results. As inbound tourism has opposite effects on domestic in­
come inequality and wealth inequality, the Icelandic government faces a
trade-off when formulating tourism-related policies to combat such in­
equalities. Inbound tourism is very likely to be synchronized with global
business cycles, so the cyclic approach taken in tourism management
depends on the goals of the Icelandic government regarding inequality.
Our work provides a first step towards analyzing the relationship
between tourism activities and inequalities within the DSGE framework,
but the study has some limitations. First, we only use proxies of income
and wealth inequalities in the model and do not generate precise mea­
surements of inequalities, such as general distribution of income and
wealth in the economy. Second, we do not consider the role of govern­
ment in the model. For example, the government can propose different
taxation and regulation policies in different sectors. How government
policy can help improve the inequality issues in the economy is a further
area of interest. Third, our analysis is only based on the model structure
and parameter values for Iceland, and a better understanding of the
range of impact of different structures and parameters can help gener­
alize the model settings to other economies, particularly those dissimilar
to Iceland, especially underdeveloped countries that are tourism-
dependent. Lastly, the 2008 deep recession might validate a structural
break in Iceland. However, our primary goal is to examine how inbound
tourism demand disturbances can shape the wage premium and house
prices over the whole sample. Therefore, we refrain from time-varying
estimates of parameters values or covariance matrices in our current
study. We consider these limitations as possible areas for future
research.
Supplementary data to this article can be found online at https://doi.
org/10.1016/j.annale.2023.100089.
Declaration of Competing Interest
N/A
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Dr. Hongru Zhang is associate professor in School of Liberal Arts at Macau University of
Science and Technology. His research interests include tourism economics, and macro-
economic modeling.
Dr. Yang Yang is associate professor in Department of Tourism and Hospitality Man­
agement at Temple University. His research focuses on tourism analytics.