Abstract. This paper studies optimal defense spending and tax structure in a dynamic economy in which public spending protects productive capital. Productive capital plays a triple role: a productive asset, the object of public protection and a tax base that can be used to finance that protection. I show that an economy can adapt to higher destruction risk by reallocating adequate resources towards both protection and production, and capital and output don't fall monotonically, although welfare declines. When defense must be financed with distortionary taxes, a Ramsey government relies mainly on labor taxation and keeps long-run capital taxation near zero to preserve the productive base; during the rebuilding transition it may subsidize capital accumulation, and the subsidy is larger when defense is less effective. While a discretionary government chooses to tax installed capital to finance defense, even though that same capital requires protection. A protection channel amplifies the standard capital-tax distortion and leads to a steady state welfare loss of approximately 2.25 percent in benchmark calibration. The results highlight the importance of fiscal credibility in an economy’s ability to adapt to destruction risk. Using the Geopolitical Risk Index to discipline the stochastic threat process, the model reproduces the positive response of defense spending to risk innovations but predicts a more immediate and sharper response than observed in the data.
with Ergys Islamaj
Abstract: Sector-specific shocks can propagate through input-output and geographic networks. We study this potential transmission in China using international, national, and interregional input-output tables, distinguishing direct industry exposure from indirect upstream and downstream exposure. China has the largest aggregate network exposure among the economies examined, approximately 50 percent of economic activity, with manufacturing accounting for a particularly large share. In an application to Chinese export demand, the estimates show positive own-industry and upstream patterns but no clear downstream response. The results provide suggestive evidence consistent with propagation from directly exposed industries to their domestic suppliers.
Abstract. This paper studies how the effectiveness of government spending varies across local economies. Matching granular U.S. defense procurement data and county-level labor market outcomes, I try to estimate local fiscal effects and examine how spending composition shapes economic performance. Preliminary results suggest that technology-intensive procurement generates more persistent employment and income gains. The findings highlight the role of local absorptive capacity and human capital accumulation in fiscal transmission.
with Mihyun You
“Propagation of Macroeconomic Shocks Through Input-Output and Geographic Networks in China,” in East Asia and Pacific Economic Update, April 2019: Managing Headwind, World Bank, 34-36, with Ergys Islamaj and Francesca de Nicola.
"Informal Economy in East Asia and Pacific,'' in Global Economic Prospects, January 2019: Darkening Skies, World Bank, 63-67
"Spillovers to Developing East Asia and Pacific from China",' in East Asia and Pacific Economic Update, October 2018: Navigating Uncertainty, World Bank, 39-42, with Ergys Islamaj and Ekaterine T. Vashakmadze.
Analysis featured by The Financial Times
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