Price dynamics, foreign exchange and anticipated shocks in a tourism economy

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.