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Transfer problem dynamics: Macroeconomics of the Franco-Prussian war indemnity

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  • Devereux, Michael B.
  • Smith, Gregor W.

Abstract

We study the classic transfer problem of predicting the effects of an international transfer on the terms of trade and the current account. A two-country model with debt and capital allows for realistic features of historical transfers: they follow wartime increases in government spending and are financed partly by borrowing. The model is applied to the largest historical transfer, the Franco-Prussian War indemnity of 1871-1873. In these three years, France transferred to Germany an amount equal to 22 percent of a year's GDP. When the transfer is combined with measured shocks to fiscal policy and a proxy for productivity shocks over the period, the model provides a very close fit to the historical sample paths of French GDP, terms of trade, net exports, and aggregate consumption. This makes a strong case for the dynamic general equilibrium approach to studying the transfer problem.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 54 (2007)
Issue (Month): 8 (November)
Pages: 2375-2398

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Handle: RePEc:eee:moneco:v:54:y:2007:i:8:p:2375-2398

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Web page: http://www.elsevier.com/locate/inca/505566

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Cited by:
  1. Martin Boileau & Michel Normandin, 2004. "The Current Account and the Interest Differential in Canada," Cahiers de recherche 0424, CIRPEE.
  2. Michel Normandin & Martin Boileau, 2003. "Dynamics of the Current Account and Interest Differentials," Cahiers de recherche 03-05, HEC Montréal, Institut d'économie appliquée.
  3. Frank D Lewisf, 2006. "Compensation and the Abandoned Property of the 1948 Palestinian Refugees: Assessment and Implications," Working Papers 1117, Queen's University, Department of Economics.
  4. Gul Ertan Ozguzer & Luca Pensieroso, 2010. "Worthy Transfers? A Dynamic Analysis of Turkey's Accession to the European Union," Working Papers 1003, Izmir University of Economics.
  5. Pascal Towbin, 2013. "Financial Integration And External Sustainability," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 18(4), pages 375-395, October.
  6. Martin Bodenstein, 2006. "Closing open economy models," International Finance Discussion Papers 867, Board of Governors of the Federal Reserve System (U.S.).
  7. Martin Boileau & Michel Normandin, 2005. "Closing International Real Business Cycle Models with Restricted Financial Markets," Cahiers de recherche 0506, CIRPEE.
  8. Michael B. Devereux & Gregor W. Smith, 2004. "Transfer Problem Dynamics: Macroeonomics of the Franco-Prussian War Indemnity," Working Papers 022004, Hong Kong Institute for Monetary Research.
  9. Alok Johri & Marc-Andre Letendre & Daqing Luo, 2011. "Organizational Capital and the International Co-movement of Investment," Department of Economics Working Papers 2011-03, McMaster University.
  10. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
  11. International Monetary Fund, 2008. "Macroeconomic Effects of EU Transfers in New Member States," IMF Working Papers 08/223, International Monetary Fund.

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