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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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