Contributions in Merlin

The Covid-19 pandemic represents an unprecedented economic shock, insofar as it cumulates the effect of both a demand and a supply shock on the aggregate economy, as well as an unprecedented increase in trading costs. In response to this shock, global trade has declined by approximately 30% in the course of the first six months of 2020, but the subsequent rebound of trade volumes during the summer suggests a quick recovery of international exchanges. A detailed analysis of the times series across countries and sectors reveals the magnifying effects of sanitary measures and export restrictions on the effect of the pandemic on global trade. The absence of a significant decline in trade of essential goods and in particular of medical goods is nonetheless cause for optimism, as it illustrates the resilience of global trade relations.

Talks of “deglobalization” or “slowbalization” have multiplied in the aftermath of the Great Trade Collapse of 2008/2009. The recent economic shock of the COVID-19 pandemic and the war in Ukraine have re-ignited fears of global value chain disruptions, and lead many in international trade to claim the end of globalization as we know it. In this Kühne Impact Series we examine these facts and find that while few statistics point towards a slowdown in global trade, looking at the broad picture we can still be cautiously optimistic. More concerns arise, instead, when looking at the policy landscape.

Africa accounts today for 17% of the world’s population, but less than 3% of global GDP. With a fast-growing population, the continent is projected to reach 4.3 billion inhabitants (39% of the world’s total) by the end of the century. This big domestic market could represent a significant opportunity, but the economy of the continent is not growing at the same pace. In fact, Africa is still struggling to overcome its colonial past, and to gain from its current (new-colonial) dependency from China. The consequences of this can be seen in the extremely low share of intra-African trade and the underdeveloped within-continent infrastructure network. The newly implemented African Continent Free Trade Area (AfCFTA) could prove to be a pivotal step forward, paving the way for self-sustaining economic growth and long-lasting social and geo-political stability on the African continent.

The World Trade Organization (WTO) has a new Director General, and we take her appointment as an opportunity to brief the reader on this important international organization. In particular, we (i) explain its past achievements, (ii) discuss its current challenges, and (iii) summarize its planned reforms.

When we talk about the economic consequences of COVID-19, the question arises about the strength and duration of the changes triggered by the pandemic. Currently, all indications are that COVID-19 is likely to change the structure of the world economy permanently. Evidence suggests that the pandemic is a permanent reallocation shock – one that cannot be mitigated with standard fiscal and monetary stimulus. What are the structural reforms and mechanisms that would allow economies to adapt and to effectively reallocate resources in response to such shocks? Which features made economies resilient to major reallocation shocks in the past? To answer these questions, we take a closer look at the China Trade Shock and its impact on the US economy. We then draw lessons for Europe today.

We develop a new method for characterizing global solutions to search and matching models with aggregate shocks and heterogeneous agents. We formulate general equilibrium as a high dimensional partial differential equation (PDE) with the distribution as a state variable. Solving this problem has previously been intractable because the distribution impacts agent decisions through the matching mechanism rather than through aggregate prices. We overcome these challenges by developing a new deep learning algorithm with efficient sampling in a high dimensional state space. This allows us to study search markets that are not “block recursive”. In applications to labor search models, we show that while block recursivity may approximately hold under symmetric shocks, it fails to capture the dynamics when shocks have an asymmetric impact. Business cycles have a “cleansing” effect by amplifying positive assortative matching in recessions, and the magnitude of the countercyclicality depends on the bargaining process between workers and firms.