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 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 subsidizing imports and production. These policy changes are consistent with cross-country evidence following recent shocks.

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: 48 pages
Date: 2020-05-05, Revised 2023-12
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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