The Determinants of Arms Expenditures of NATO and the Warsaw Pact: Some Further Evidence

Abstract

This paper examines evidence for interactions between arms spending by NATO and the Warsaw Pact. Empirical work in this area typically starts from some version of the Richardson model. Unfortunately an important characteristic of the data series (non-stationarity) means that results based upon regressions specified in levels must be viewed with suspicion. Moreover, there are reasons for believing that the dynamics of the system are more complicated than envisaged in the simple models. We circumvent these problems by adopting a modelling procedure which allows the data to reveal the dynamics and which ensures that variables enter the regressions in an appropriate manner. The basic idea is to start by testing for the existence of a long-run, or equilibrium, relationship between levels of spending. Given this, one can imagine each organization adjusting its spending to the current deviation from equilibrium. Current changes in expenditure are modelled as functions of the equilibrium deviation and of previous changes in spending by both pacts. More technically we exploit recent developments in the theory of cointegrated variables and utilize a general-to-specific modelling strategy. Our results provide evidence for the existence of an equilibrium spending configuration with the dynamic equations providing satisfactory descriptions of the data and around three-quarters of the year-to-year changes in spending being explained by the equations.