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Source: International Monetary Fund

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

Author/Editor:

Philipp Engler ; Nathalie Pouokam ; Diego Rodriguez Guzman ; Irina Yakadina

Publication Date:

November 13, 2020

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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.

Series:

Working Paper No. 2020/242

Frequency:

regular

English

Publication Date:

November 13, 2020

ISBN/ISSN:

9781513560182/1018-5941

Stock No:

WPIEA2020242

Format:

Paper

Pages:

29

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