The Great Lockdown: International Risk Sharing Through Trade and Policy Coordination
IMF Working Papers, November 13, 2020
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- The Great Lockdown: International Risk Sharing Through Trade and Policy Coordination
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Bibliographic details
- Authors: Philipp Engler, Nathalie Pouokam, Diego Rodriguez Guzman, Irina Yakadina
- Published: November 13, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513560182.001
Research question and model
- Presents a parsimonious two-country-SIR model with some degree of substitutability between home and foreign goods.
- Examines how voluntary and government-mandated lockdowns in response to COVID-19 cause drastic reductions in economic activity and interact with international trade and containment policies.
Key findings
- Trading partners’ asynchronous entries into the global pandemic induce mutual welfare gains from trade.
- These gains are realized through exchange rate adjustments that cause a temporary reallocation of production towards the economy with the lowest infection rate at any point in time.
- International cooperation over containment policies that aim at optimizing global welfare further enhances the ability of countries to exploit trade opportunities to contain the spread of the pandemic.
- The strategic choice of containment policies across countries is characterized as a prisoners’ dilemma in the Nash game formulation.
Policy implications and recommendations
- Coordination of containment policies can increase global welfare by improving the exploitation of trade-based reallocation opportunities during asynchronous pandemic dynamics.
- Uncoordinated, strategic behavior in containment choices can lead to suboptimal global outcomes due to the prisoners’ dilemma structure; policy coordination mechanisms are therefore welfare-enhancing.
Subject areas and keywords (as provided)
- Subject: Consumption, Consumption taxes, COVID-19, Health, International trade, Labor, National accounts, Taxes, Terms of trade
- Keywords: Consumption, Consumption taxes, containment policy, cooperation, COVID-19, epidemic, expenditure switching, Global, Great Lockown, home economy, infection externality, optimal containment, possibilities frontier, SIR macro model, Terms of trade, terms of trade adjustment, trade, WP
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- Working Paper