Arms Race Dynamics and Economic Stability

Abstract

In the research reported on in this paper, a hybrid continuous-time model of the U.S. macroeconomy and the arms race between the U.S. and the Soviet Union is formed from two previously developed structural models and fitted with data from the 1960s and 1970s for the purpose of analyzing how changes in arms race dynamics might have influenced developments in the macroeconomy and the stability of this coupled system structure. In terms of standard measures of model assessment, the hybrid model is found to capture well developments in these two decades. Estimates of the model's parameters indicate that changes in the levels of variables in the arms race equations had discernible impacts on macroeconomic variables, although these impacts do not appear to have been large. The growth process characterized by the model was cyclical and appears to have been stable. This stability, however, is likely to have been susceptible to changes in the rates of adjustment in arms stocks, military spending levels, and key macro-economic variables. The stability of each of the subsystems seems to have been relatively unaffected by developments in the other.