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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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Suggested Citation

  • Devereux, Michael B. & Smith, Gregor W., 2005. "Transfer Problem Dynamics: Macroeconomics of the Franco-Prussian War Indemnity," Queen's Economics Department Working Papers 273461, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273461
    DOI: 10.22004/ag.econ.273461
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    Keywords

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    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; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-

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