The Great Lockdown: International Risk Sharing Through Trade and Policy Coordination

By Philipp Engler, Nathalie Pouokam, Diego Rodriguez Guzman, Irina Yakadina

November 13, 2020

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Philipp Engler, Nathalie Pouokam, Diego Rodriguez Guzman, and Irina Yakadina. The Great Lockdown: International Risk Sharing Through Trade and Policy Coordination, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

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

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/242
Stock No:

WPIEA2020242
ISBN:

9781513560182
ISSN:

1018-5941

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