Dynamic Effects of Tourism Shocks on Innovation in an Open-Economy Schumpeterian Growth Model

Chu, Angus C. and Liao, Chih-Hsing and Xu, Rongxin and Chen, Ping-ho (2021): Dynamic Effects of Tourism Shocks on Innovation in an Open-Economy Schumpeterian Growth Model. Forthcoming in: Economic Modelling

Abstract

International travel restrictions during the COVID-19 pandemic drastically reduced the number of tourists. This study explores the dynamic effects of tourism shocks in an open-economy Schumpeterian model with endogenous market structure. A tourism shock affects the economy via a reallocation effect and an employment effect. A positive tourism shock increases employment, which raises production and innovation in the short run. However, a positive tourism shock also reallocates labor from production to service for tourists, which reduces production and innovation. If leisure preference is weak, the reallocation effect dominates, and the short-run effect of positive tourism shocks on innovation is monotonically negative. If leisure preference is strong, the employment effect dominates initially, and the short-run effect of tourism shocks on innovation becomes inverted-U, which is consistent with the stylized facts that we document using cross-country data. Finally, permanent tourism shocks do not affect the steady-state innovation rate in our scale-invariant model.

• Item Type: MPRA Paper
• Language: English
• Keywords: tourism shocks; innovation; endogenous market structure
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity; Z - Other Special Topics > Z0 - General

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