This paper explores the interactions between domestic politics and international conflict. The analysis shows that electoral uncertainty associated with competition between political parties, each representing a specific group of the electorate, imparts a negative "bias" on the nation's military spending, given military spending by other nations. In turn, electoral uncertainty lowers other nations' incentive to arm as well. In this context, democratic institutions can be thought of as a possible "precommitment" mechanism that reduces the severity of conflict between nations and, thereby, increases the amount of resources available globally for consumption.

To develop a positive, economic theory of military spending, the analysis focuses on a game-theoretic, general equilibrium model of international conflict, in which consumption, peaceful investment, and military spending are endogenously determined. The analysis illustrates that when there is repeated interaction between nations, a game of threats and punishments generally will not support a disarmament outcome and that fluctuations in military spending can be an endogenous result of fluctuations in aggregate economic activity. Furthermore, the analysis shows how the relation between aggregate economic activity and military spending qualitatively depends on whether governments are acting opportunistically or cooperatively.

This paper analyzes a multiperiod monetary targeting procedure as a possible resolution to the credibility problem in policy when the monetary authority has some private information. By limiting the degree of flexibility permitted in policy, this procedure mitigates the credibility problem. As the length of the targeting horizon decreases, the severity of the credibility problem falls, but at the expense of weakening the monetary authority's ability to pursue its stabilization goals. Based on model simulations, the analysis studies the determinants of the optimal targeting horizon that balances the benefits of flexibility and discipline in policy.

To develop a positive, economic theory of military spending, this analysis focuses on a game-theoretic, general equilibrium model of international conflict, in which consumption, peaceful investment, and military spending are endogenously determined. The analysis illustrates that when there is repeated interaction between nations, a game of threats and punishments generally will not support a disarmament outcome and that fluctuations in military spending can be an endogenous result of fluctuations in aggregate economic activity. Furthermore, the analysis shows how the relation between aggregate economic activity and military spending qualitatively depends on whether governments are acting opportunistically or cooperatively.

Garfinkel: Department of Economics, University of fornia, 3151 Social Science Plaza, Irvine, CA 92697; Lee: artment of Economics, University of California, 3151 SoScience Plaza, Irvine, CA 92697, and International MonFund, 700 19th Street, NW, Washington, DC 20431. We k, without implicating, Avinash Dixit, Amihai Glazer, chel Grossman, Luisa Lambertini, Stergios Skaperdas, an ymous referee, and seminar participants at the University alifornia-Los Angeles, California State Universityerton, and the 1998 Winter Meetings of the Econometociety for helpful comments on previous drafts of this r, which had been circulated under the title “Political ipline and the Dynamic Consistency of Policy.” The s expressed in this paper are those of the authors and ld not be attributed to the International Monetary Fund. See Torsten Persson and Guido Tabellini (1990) for a ul survey of this literature.