Safeguarding Free Trade in Recessions : - A Game-Theoretic Interpretation of the Multilateral Policy Response to the 2008 Crisis

Abstract: I propose a simple approach to trade cooperation in economic shocks. A two-country, two-good trade model provides a stage setting. In a dynamic model, international demand for traded goods is allowed to be subject to sudden shocks. Numerical simulations predict that negative, sustained demand shocks may spark trade wars. Negative demand shocks that are short relative to the period it takes for governments to detect violations render instead incentives in free trade agreements more robust. I find that the multilateral policy response to the 2008 crisis - to temporarily enhance multilateral information mechanisms - may have worked to strengthen this effect.