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

41 Pages Posted: 12 Aug 2004 Last revised: 2 Aug 2022

Date Written: May 1, 2004

Abstract

This working paper was written by Michael B. Devereux (University of British Columbia) and 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. 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.

Keywords: transfer problem, current account, terms of trade

JEL Classification: F32, F41, N14

Suggested Citation

Submitter, Hong Kong Institute for Monetary and Financial Research, Transfer Problem Dynamics: Macroeconomics of the Franco-Prussian War Indemnity (May 1, 2004). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 02/2004, Journal of Monetary Economics, Vol. 54, No. 8, 2007, Available at SSRN: https://ssrn.com/abstract=575681 or http://dx.doi.org/10.2139/ssrn.575681

Hong Kong Institute for Monetary and Financial Research Submitter (Contact Author)

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