Current account adjustment and retained earnings. (June 2019)

• Record Type: Journal Article
• Authors: Fischer, Andreas M.; Groeger, Henrike; Sauré, Philip; Yeşin, Pınar
• Is Part Of: Journal of international money and finance. Volume 94(2019)
• Page Start: 246
• Page End: 259
• Publication Date: 2019-06
• Subjects: Current account adjustment -- Financial centers -- Retained earnings -- Equity investment; F32 -- F47 -- G11; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2019.02.002
• Languages: English
• ISSNs: 0261-5606

Abstract

Abstract: 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 is 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.