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

  • Michael B. Devereux

    ()

    (University of British Columbia)

  • Gregor W. Smith

    ()

    (Queen's University)

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://qed.econ.queensu.ca/working_papers/papers/qed_wp_1025.pdf
File Function: First version 2005
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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
Date of revision:
Handle: RePEc:qed:wpaper:1025
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