DP13142 Current account adjustment and retained earnings
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.
