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

Download or read book The Great Lockdown: International Risk Sharing Through Trade and Policy Coordination written by Philipp Engler and published by INTERNATIONAL MONETARY FUND. This book was released on 2020-11-13 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.