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

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. •A DSGE model examines the impact of tourism growth and economic inequalities.•The model includes the tourism sector and the real estate market.•Tourism boom lowers income inequality and increases in wealth inequality.