Monetary policy and exchange rate regime in tourist islands

Abstract

The broad impact of the travel industry on economies has been comprehensively analysed in the tourism literature. Despite this, its consequences for monetary policy have remained unaddressed. This article aims at providing a first approach in this line for the case of three small tourist islands such as Cabo Verde, Mauritius and Seychelles. The research is based on a Bayesian estimation using a dynamic stochastic general equilibrium model (DSGE), and the optimal response to a tourism demand shock of four monetary policies is analysed. According to the results, both a conventional peg and an inflation-targeting policies achieve better economic performance. More precisely, the inflation is lower in the former. However, the rise in consumption and the gain in the external competitiveness are sharper in the latter. Finally, the other two policies, an inflation-targeting with managed exchange rate policy and an imported-inflation targeting policies, generate higher consumption and external competitiveness, but, also higher inflation and interest rate.