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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. We investigate the ability of the model to account for the historical path of French GDP, terms of trade, net exports, and aggregate consumption. When combined with measured shocks to fiscal policy and productivity over the period, the model provides a very close fit to the historical sample path. This makes a strong case for the dynamic general equilibrium approach to studying the transfer problem. More generally, our results provide striking evidence of the importance of international capital markets in the nineteenth century.

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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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Citations

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Cited by:
  1. Lewis, Frank D., 2007. "Compensation and the abandoned property of the 1948 Palestinian refugees: Assessment and implications," Explorations in Economic History, Elsevier, vol. 44(4), pages 523-537, October.
  2. Martin Boileau & Michel Normandin, 2004. "The Current Account and the Interest Differential in Canada," Cahiers de recherche 0424, CIRPEE.
  3. Johri, Alok & Letendre, Marc-André & Luo, Daqing, 2011. "Organizational capital and the international co-movement of investment," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 511-523.
  4. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
  5. Martin Boileau & Michel Normandin, 2005. "Closing International Real Business Cycle Models with Restricted Financial Markets," Cahiers de recherche 0506, CIRPEE.
  6. Martin Bodenstein, 2006. "Closing open economy models," International Finance Discussion Papers 867, Board of Governors of the Federal Reserve System (U.S.).
  7. Towbin, P., 2012. "Financial Integration and External Sustainability," Working papers 388, Banque de France.
  8. 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.
  9. 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.
  10. International Monetary Fund, 2008. "Macroeconomic Effects of EU Transfers in New Member States," IMF Working Papers 08/223, International Monetary Fund.
  11. Martin Boileau & Michel Normandin, 2003. "Dynamics of the Current Account and Interest Differentials," Cahiers de recherche 0339, CIRPEE.

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