Transfer problem dynamics: Macroeconomics of the Franco-Prussian war indemnity

We study the classic,:transfer problem using the largest historical example, the Franco-Prussian War indemnity of 1871-1.873 which saw France transfer to Germany 25% of a year's GDP. A dynamic, two-country model allows for debt finance, supply-side effects, and controls for wartime spending. The model can, fit the historical paths of French net exports and the terms of trade. But explaining French output and consumption requires additional shocks. These results illustrate the usefulness of, the DSGE approach to the transfer problem and provide striking evidence of the importance of international capital markets in the 19th century. (c) 2007 Elsevier B.V. All rights reserved.