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Transfer Problem Dynamics: Macroeonomics of the Franco-Prussian War Indemnity

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  • Michael B. Devereux

    (Hong Kong Institute for Monetary Research)

  • Gregor W. Smith

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

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 022004.

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Length: 42 pages
Date of creation: Jan 2004
Date of revision:
Handle: RePEc:hkm:wpaper:022004

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Keywords: transfer problem; current account; terms of trade;

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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. 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.
  3. Boileau, Martin & Normandin, Michel, 2008. "Dynamics of the current account and interest differentials," Journal of International Economics, Elsevier, vol. 74(1), pages 35-52, January.
  4. Martin Boileau & Michel Normandin, 2005. "Closing International Real Business Cycle Models with Restricted Financial Markets," Cahiers de recherche 0506, CIRPEE.
  5. Martin Boileau & Michel Normandin, 2004. "The Current Account and the Interest Differential in Canada," Cahiers de recherche 0424, CIRPEE.
  6. Towbin, P., 2012. "Financial Integration and External Sustainability," Working papers 388, Banque de France.
  7. Gül Ertan Özgüzer, 2009. "Worthy Transfers? A Dynamic Analysis of Turkey's Accession to the European Union," 2009 Meeting Papers 781, Society for Economic Dynamics.
  8. 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.
  9. Martin Bodenstein, 2006. "Closing open economy models," International Finance Discussion Papers 867, Board of Governors of the Federal Reserve System (U.S.).
  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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