ELECTORAL CYCLES AND INTERNATIONAL-POLICY COOPERATION

This paper analyzes the interaction between domestic politics and international policy cooperation as a two-level repeated prisoners' dilemma. At the domestic level, two-party competition generates an electoral cycle in monetary growth, inflation and real output. At the international level, the policymakers' desire to promote domestic expansion by depreciating the currency gives rise to an inflationary bias in monetary growth. A move towards international cooperation reduces the inflationary bias but may increase the amplitude of the electoral cycle. Moreover, international cooperation may not be desirable for one of the domestic parties. Nevertheless, domestic and international cooperation may be jointly sustained by the credible threat of a reversion to the regime under which the destabilizing effect of domestic politics is at a maximum.