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A dynamic model of capital and arms accumulation

  • Heng-fu Zou

    (Policy Research Department, The World Bank)

How does competitive arms accumulation affect investment and capital accumulation? In a dynamic optimization framework including both investment and military spending, we find that, when the utility function is separable between consumption and the weapon stocks, an unanticipated rise in current military threat reduces current investment and an anticipated rise in future military threat stimulates current investment. But when the utility function is nonseparable between consumption and the weapon stocks, a current military threat may not decrease the short-run investment. In the long run, capital accumulation is independent of the military conflicts among countries regardless of the form of the utility function.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 80.

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Length: 23 pages
Date of creation: 1995
Date of revision:
Publication status: Published in Journal of Economic Dynamics and Control, Volume 19, Issues 1-2, January-February 1995, Pages 371-393
Handle: RePEc:cuf:wpaper:80
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  1. Mankiw, N Gregory, 1987. "Government Purchases and Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 407-19, April.
  2. Simaan, M & Cruz, J B, Jr, 1975. "Formulation of Richardson's Model of Arms Race from a Differential Game Viewpoint," Review of Economic Studies, Wiley Blackwell, vol. 42(1), pages 67-77, January.
  3. Deger, Saadet & Sen, Somnath, 1984. "Optimal control and differential game models of military expenditure in less developed countries," Journal of Economic Dynamics and Control, Elsevier, vol. 7(2), pages 153-169, May.
  4. Intriligator, Michael D, 1975. "Strategic Considerations in the Richardson Model of Arms Races," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 339-53, April.
  5. Kenneth L. Judd, 1983. "Short-Run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Discussion Papers 559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Deger, Saadet & Sen, Somnath, 1983. "Military expenditure, spin-off and economic development," Journal of Development Economics, Elsevier, vol. 13(1-2), pages 67-83.
  7. Judd, Kenneth, 1987. "Debt and distortionary taxation in a simple perfect foresight model," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 51-72, July.
  8. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November.
  9. van der Ploeg, F. & de Zeeuw, A.J., 1988. "Perfect equilibrium in a model of competitive arms accumulation," Discussion Paper 1988-4, Tilburg University, Center for Economic Research.
  10. Michael D. Intriligator & D. L. Brito, 1976. "Formal Models of Arms Races," Conflict Management and Peace Science, Peace Science Society (International), vol. 2(1), pages 77-88, February.
  11. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, vol. 10(1-2), pages 55-59.
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