Working Paper: CEPR ID: DP13142
Authors: Andreas M. Fischer; Henrike Groeger; Philip Saure; Pinar Yesin
Abstract: This paper develops a formal strategy to calculate current accountswith retained earnings (RE) on equity investment and analyzes their adjustmentduring the global financial crisis. RE are the part of companies' profits whichare reinvested and not distributed to shareholders as dividends. Internationalstatistical standards treat RE on foreign direct investment and RE on portfolioinvestment differently: while the former enter the current and financial account,the latter do not. We show that this differential treatment strongly affects currentaccounts of several advanced economies, frequently referred to as financial centers,with large positions in equity (portfolio) investment. Our empirical analysis findsthat the differential treatment of RE alters the interpretation of current accountadjustment for the global financial crisis.
Keywords: current account adjustment; financial centers; retained earnings; equity investment
JEL Codes: F32; F47; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| retained earnings (G35) | current account adjustments (F32) |
| differential treatment of retained earnings on FDI vs portfolio investments (F21) | misinterpretation of current account balances (F32) |
| large net equity liabilities (G32) | greater current account adjustments (F32) |
| fall in corporate profits (G33) | adjustments in income flows (F32) |
| retained earnings remained small during GFC (O16) | larger adjustments in income flows (F32) |
| corrected current accounts with retained earnings (F32) | significant current account corrections (F32) |