Current account adjustment and retained earnings
Andreas M. Fischer, Henrike Groeger, Philip U. Sauré and Pinar Yesin
F32, F47, G11
Current account adjustment, financial centers, retained earnings, equity investment
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.