The Great Lockdown: International Risk Sharing Through Trade and Policy Coordination
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Summary:
Voluntary and government-mandated lockdowns in response to COVID-19 have caused causing drastic reductions in economic activity around the world. We present a parsimonious two-country-SIR model with some degree of substitutability between home and foreign goods, and show that trading partners’ asynchronous entries into the global pandemic induce mutual welfare gains from trade. Those 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. We show that 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. We characterize the Nash game of strategic choices of containment policies as a prisoners’ dilemma.
Series:
Working Paper No. 2020/242
Subject:
Consumption Consumption taxes COVID-19 Health International trade Labor National accounts Taxes Terms of trade
Frequency:
regular
English
Publication Date:
November 13, 2020
ISBN/ISSN:
9781513560182/1018-5941
Stock No:
WPIEA2020242
Pages:
29
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