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

Fernando Leibovici and Ana Maria Santacreu

No 2020-010, Working Papers from Federal Reserve Bank of St. Louis

Abstract: 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 shows that export taxes, import subsidies, and production subsidies mitigate shortages, increase welfare, and align with observed cross-country policy responses.

Keywords: international trade; trade policy; industrial policy; shortages of critical goods (search for similar items in EconPapers)
JEL-codes: F1 F5 F6 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2020-05-05, Revised 2025-06-20
New Economics Papers: this item is included in nep-int and nep-upt
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:87897

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DOI: 10.20955/wp.2020.010

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