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

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Author Info
Michael B. Devereux () (University of British Columbia)
Gregor W. Smith () (Queen's University)

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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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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1025.pdf
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1025.

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Length: 55 pages
Date of creation: Aug 2005
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Handle: RePEc:qed:wpaper:1025

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

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
N14 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Europe: 1913-

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Kollmann, Robert, 2002. "Monetary policy rules in the open economy: effects on welfare and business cycles," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 989-1015, July. [Downloadable!] (restricted)
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  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier. [Downloadable!] (restricted)
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  4. Philip R. Lane & Gian Maria Milesi-Ferretti, 2000. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," Working Papers 062000, Hong Kong Institute for Monetary Research. [Downloadable!]
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  5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March. [Downloadable!] (restricted)
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  6. Gian Maria Milesi-Ferretti & Philip R. Lane, 2001. "Long-Term Capital Movements," IMF Working Papers 01/107, International Monetary Fund. [Downloadable!]
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  7. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
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  8. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  9. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1983. "The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World," American Economic Review, American Economic Association, vol. 73(4), pages 606-18, September. [Downloadable!] (restricted)
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  13. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Working Papers 91/100, International Monetary Fund.
  14. Jones, Ronald W., 1975. "Presumption and the transfer problem," Journal of International Economics, Elsevier, vol. 5(3), pages 263-274, August. [Downloadable!] (restricted)
  15. Heathcote, Jonathan & Perri, Fabrizio, 2004. "Financial globalization and real regionalization," Journal of Economic Theory, Elsevier, vol. 119(1), pages 207-243, November. [Downloadable!] (restricted)
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  16. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michel Normandin & Martin Boileau, 2003. "Dynamics of the Current Account and Interest Differentials," Cahiers de recherche 03-05, HEC Montréal, Institut d'économie appliquée. [Downloadable!]
    Other versions:
  2. Michel Normandin & Martin Boileau, 2005. "Closing International Real Business Cycle Models with Restricted Financial Markets," Cahiers de recherche 05-03, HEC Montréal, Institut d'économie appliquée. [Downloadable!]
    Other versions:
  3. Céline Allard & Nada Choueiri & Susan Schadler & Rachel van Elkan, 2008. "Macroeconomic Effects of EU Transfers in New Member States," IMF Working Papers 08/223, International Monetary Fund. [Downloadable!]
  4. Martin Boileau & Michel Normandin, 2004. "The Current Account and the Interest Differential in Canada," Cahiers de recherche 0424, CIRPEE. [Downloadable!]
    Other versions:
  5. Pascal Towbin, 2008. "Current Account Adjustment and Financial Integration," HEI Working Papers 11-2008, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
  6. Martin Bodenstein, 2006. "Closing open economy models," International Finance Discussion Papers 867, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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