On 11 June 2025 at 10:30, you a welcome to join a seminar on the topic „Optimal Fiscal Policy under Endogenous Disaster Risk: How to Avoid Wars?”, which will be presented by Vytautas Valaitis (University of Surrey).
The seminar should take around 1 hour and 30 minutes including questions and discussions. There is also the option to dial in via MS Teams.
Abstract: We examine the role of government investment in defense capital as a deterrence tool. Using an optimal fiscal policy framework with endogenous disaster risk, we allow for an endogenous determination of geopolitical risk and defense capacity, which we discipline using the Geopolitical Risk Index. We show both analytically and quantitatively that financing defense primarily through debt, rather than taxation, is optimal. Debt issuance mitigates present tax distortions but exacerbates them in the future, especially in wartime. However, since additional defense capital deters future wars, the expected tax distortions decline as well, making debt financing a welfare-improving strategy. Quantitatively, the optimal defense financing in the presence of heightened risk involves a twice higher share of debt and backloading of tax distortions compared to other types of government spending.
Full paper can be found here.