Macroeconomics of the Franco-Prussian War Indemnity

Hong Kong Institute for Monetary Research
Table 1. Evidence on the Static Model
Transfer (% GDP) Terms of Trade (% change) Real Consumption (% change)
Model Predictions (ω = 0.165 µ = 6.5)
7.24% 15.41% -12.7%
22.00% 47.00% -37.4%
France (1871-72 and 1871-74)
7.4% 1.5% 11.7%
22.0% 2.9% 8.1 %
France (1870-71 and 1870-73)
7.4% 4.1% -7.6%
22.0% 7.5% 0.2%
Notes: ω is the French share of world GDP; µ captures the home bias in the consumption of traded goods; non-traded goods
prices comprise a share γ =0.5 of the price index; the elasticity of substitution between traded and non-traded goods is
θ =1.25; the elasticity of substitution between exports and imports is λ =1.5. Consumption is measured on a per capita
basis. Appendix B gives the sources for the historical data.
Table 2. Calibration
Parameter Value Description
σ 1.00 Inverse of elasticity of substitution in consumption
β 0.94 Discount factor (annual real interest rate is (1 – β )/β )
ν 1.00 Inverse of elasticity of labour supply
η 1.00 Weight on labour supply in period utility
θ 0.75 Elasticity of substitution: traded and non-traded goods
λ 1.50 Elasticity of substitution: import and export goods
γ 0.50 Share of non-traded goods in consumption
µ 6.50 Home bias in traded-goods consumption
α 0.36 Share of capital in export sector production
κ 0.36 Share of capital in non-traded sector production
δ 0.10 Annual rate of capital depreciation (in both sectors)
φ ′ /φ ′′ 0.30 Elasticity of q with respect to the investment-capital ratio
χ -0.01 Elasticity of real interest rate to net foreign assets
ω 0.165 Share of France in world GDP
Note: Parameter values are discussed in section 6.
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