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

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,
Nathalie Pouokamnull

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,
Diego Rodriguez Guzman
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, and
Mrs. Irina Yakadina
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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 242
Language:
English
Publication Date:
13 Nov 2020
DOI:
https://doi.org/10.5089/9781513560182.001
ISBN:
9781513560182
ISSN:
1018-5941
Pages:
29
Keywords:
Great Lockown; epidemic; trade; optimal containment; cooperation; SIR macro model; WP; containment policy; home economy; expenditure switching; possibilities frontier; infection externality; terms of trade adjustment; COVID-19; Consumption; Terms of trade; Consumption taxes; Global
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2020: Issue 242