Maxim Alekseev

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, as measured by the narrowing of regional differences in bank loan interest rates. We explain this pattern with a model in which banks face frictions in accessing external capital markets and are restricted by regulation from using internal capital markets 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 ultimately erodes regional differences in bank loan interest rates. We nest our banking model in a quantitative dynamic spatial model and show that financial integration explains up to a fifth of the higher observed growth in GDP and population of the American South and West and of the relative decline of the Northern financial centers. We draw the implications of our findings for current debates on capital market integration. Low-rate environments amplify frictions introduced by restrictions on capital flows, substantially increasing the gains from deregulation.

Policymakers increasingly use trade instruments to address national security concerns. This paper studies optimal policy for dual-use goods—items such as semiconductors or drones that have both military and civilian applications. We begin by empirically documenting that the 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, which ranges from zero to one, by scaling the U.S. closed-economy military centrality by import demand elasticities. Our measure effectively evaluates policy restrictions and military content in trade flows. To quantify the macroeconomic magnitude of the consumption-security trade-off, we calibrate our model to a potential U.S.-China conflict. The revealed preference estimate of the value placed on the probability of winning the conflict equals 2.5 times the annual U.S. GDP.