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

Michael B. Devereux () and Gregor W. Smith

No 1025, Working Papers from Queen's University, Department of Economics

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.

Keywords: transfer problem; current account; terms of trade (search for similar items in EconPapers)
JEL-codes: F32 F41 N14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his, nep-int and nep-mac
Date: 2005-08
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http://www.econ.queensu.ca/working_papers/papers/qed_wp_1025.pdf First version 2005 (application/pdf)

Related works:
Working Paper: Transfer Problem Dynamics: Macroeonomics of the Franco-Prussian War Indemnity (2004)
Journal Article: Transfer problem dynamics: Macroeconomics of the Franco-Prussian war indemnity (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:1025

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