Shortages of Critical Goods in a Global Economy
Abstract: This paper studies shortages of critical goods in an open economy with credit market frictions and the role of trade and industrial policy in mitigating them. We develop a dynamic model with essential and non-essential goods, heterogeneous households and concentrated firm ownership. When global demand for essential goods rises, leverage-dependent borrowing premia lead firms to underinvest, and trade amplifies domestic shortages as producers shift supply toward exports. Calibrated to the U.S. during COVID-19, we show that export taxes, import subsidies and production subsidies can mitigate shortages and raise welfare. The effectiveness of financial support depends on its design and funding.
DOI: https://doi.org/10.24149/wp2637
Appendix DOI: https://doi.org/10.24149/wp2637app