Maxim Alekseev

Trade and industrial policies are increasingly shaped by national security concerns. This paper studies optimal policy for dual-use goods, items with both military and civilian applications. We begin by documenting motivating facts about production, exchange, and regulation of dual-use goods across countries and over time. To put structure on our problem, we introduce defense procurement into a trade network model and add a military contest externality to the national welfare function. In a simple two-country case, optimal export taxes depend on the 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 US defense procurement data, we construct empirical counterparts of our optimal tax formulas and show that those are associated with policy targeting and trade responses around conflicts. The resulting pecking order of dual-use goods allows us to evaluate sanctions against Russia and the US security restrictions. To quantify the military contest externality, we calibrate our model to a potential US-China conflict. Our revealed preference estimate of the conflict prize amounts to 250% US GDP. We conclude with some takeaways for policymakers.

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.