Maxim Alekseev

Policymakers increasingly use trade instruments to address national security concerns. This paper studies optimal policy for dual-use goods, items with both military and civilian applications. We begin by empirically documenting that regulation and trade flows of dual-use goods respond to changes in the security environment over time. To put structure on the national security externality, we introduce military procurement into a multi-country general equilibrium network model and add a military contest to the national welfare function. In a simple two-country case, optimal export taxes depend on a trade-off between the good's military centrality and its distortion centrality. Military centrality is a network-adjusted sales share to the foreign military; distortion centrality reflects taxation misallocation in the domestic economy from roundabout imports. Using U.S. defense procurement data, we construct a measure of military use across goods, ranging from zero to one, by scaling the U.S. closed-economy military centrality by import demand elasticities. Our measure predicts policy targeting and trade responses around conflicts and allows us to evaluate the U.S. security restrictions and global sanctions against Russia. To quantify the macroeconomic magnitude of the consumption-security trade-off, we calibrate our model to a potential U.S.-China conflict. Our revealed preference estimate of the conflict prize amounts to 250% annual U.S. GDP.

What drives the integration of national financial markets and what are its consequences for regional growth? We digitize and collect US state-level banking data from 1953 to 1983 and document a tight link between high nominal short rates and financial integration, measured as the narrowing of regional differences in bank lending rates. We explain this pattern in a framework in which external capital markets are frictional and regulation restricts banks from using internal ones to move funds across regions. An increase in the nominal rate fosters integration because it prompts households to move their liquidity away from unremunerated deposits at their local banks and towards national money markets (e.g. via money-market funds). This forces banks to seek more funding from national markets and makes lending less dependent on local deposits, which erodes differences across states in banks' financing costs and, in turn, in lending rates. We nest our banking model in a quantitative dynamic spatial model and show that financial integration explains up to a fifth of the rise of the American South and West and decline of the Northern financial centers of those years. We also show that deregulation aimed at integrating capital markets might have substantially larger effects than previously thought. Estimates of these effects mostly come from the post-1982 US interstate branching deregulation, but this episode occurred after an exceptionally high-rate environment where market forces had already generated substantial integration.