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

  • Michael B. Devereux

    (Hong Kong Institute for Monetary Research)

  • Gregor W. Smith

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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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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  1. White, Eugene N., 2001. "Making the French pay: The costs and consequences of the Napoleonic reparations," European Review of Economic History, Cambridge University Press, vol. 5(03), pages 337-365, December.
  2. Flandreau, Marc, 1995. "An Essay on the Emergence of the International Gold Standard, 1870-80," CEPR Discussion Papers 1210, C.E.P.R. Discussion Papers.
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    • Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136 National Bureau of Economic Research, Inc.
  10. Ohanian, Lee E, 1997. "The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War," American Economic Review, American Economic Association, vol. 87(1), pages 23-40, March.
  11. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
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  17. Kindleberger, Charles P., 1993. "A Financial History of Western Europe," OUP Catalogue, Oxford University Press, edition 2, number 9780195077384, March.
  18. Devereux, Michael B. & Smith, Gregor W., 2007. "Transfer problem dynamics: Macroeconomics of the Franco-Prussian war indemnity," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2375-2398, November.
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  24. Philip L. Brock, 1996. "International Transfers, the Relative Price on Non-Traded Goods, and the Current Account," Canadian Journal of Economics, Canadian Economics Association, vol. 29(1), pages 163-80, February.
  25. Mill, John Stuart, 1874. "Essays on Some Unsettled Questions of Political Economy," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, edition 2, number mill1874.
  26. Gavin, Michael, 1992. "Intertemporal Dimensions of International Economic Adjustment: Evidence from the Franco-Prussian War Indemnity," American Economic Review, American Economic Association, vol. 82(2), pages 174-79, May.
  27. Jones, Ronald W., 1975. "Presumption and the transfer problem," Journal of International Economics, Elsevier, vol. 5(3), pages 263-274, August.
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