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Shortages of Critical Goods in a Global Economy: Optimal Trade and Industrial Policy


Abstract: This paper studies shortages of critical goods in a global economy and the role for policy. We develop a dynamic general equilibrium model of trade with producers of essential and non-essential goods owned by heterogeneous households under incomplete markets. A global increase in demand for critical goods increases prices and production, but there is underinvestment relative to an economy with a representative household or complete markets. Trade exacerbates the shock as producers reallocate domestic sales toward exports. Shortages can be mitigated, increasing welfare, by taxing exports while subsidizing imports and production. These policy changes are consistent with cross-country evidence during COVID-19.

Keywords: international trade; trade policy; industrial policy; shortages of critical goods; COVID-19;

JEL Classification: F1; F5; F6;

https://doi.org/10.20955/wp.2020.010

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2023-02

Number: 2020-010

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