DP13142 Current account adjustment and retained earnings

Author(s): Andreas M Fischer, Henrike Groeger, Philip Sauré, Pinar Yesin
Publication Date: August 2018
Keyword(s): financial centers, Current account adjustment, equity investment, financial centers, retained earnings
JEL(s): F32, F47, G11
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13142

This paper develops a formal strategy to calculate current accounts with retained earnings (RE) on equity investment and analyzes their adjustment during the global financial crisis. RE are the part of companies' profits which are reinvested and not distributed to shareholders as dividends. International statistical standards treat RE on foreign direct investment and RE on portfolio investment differently: while the former enter the current and financial account, the latter do not. We show that this differential treatment strongly affects current accounts of several advanced economies, frequently referred to as financial centers, with large positions in equity (portfolio) investment. Our empirical analysis finds that the differential treatment of RE alters the interpretation of current account adjustment for the global financial crisis.