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Working Paper
Shortages of Critical Goods in a Global Economy: Optimal Trade and Industrial Policy
This paper studies optimal trade and industrial policy in response to shortages of critical goods following global shocks. We develop a dynamic open-economy model with essential and non-essential goods, heterogeneous households, and incomplete financial markets. When global demand for essential goods rises, households fail to internalize how their borrowing choices affect aggregate interest rates, leading to excessive discounting of future returns and underinvestment. Trade amplifies shortages as producers reallocate supply toward exports. Calibrated to the U.S. during COVID-19, the model ...
Working Paper
Shortages of Critical Goods in a Global Economy: Optimal Trade and Industrial Policy
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 ...
Working Paper
Shortages of Critical Goods in a Global Economy: Optimal Trade and Industrial Policy
This paper studies the role for optimal trade and industrial policy to mitigate shortages of critical goods following global shocks. We develop a dynamic model of trade with producers of essential and non-essential goods owned by heterogeneous households under incomplete markets. Shocks that increase global demand for critical goods lead to 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 ...