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Technology capital and the U.S. current account

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  • Ellen R. McGrattan
  • Edward C. Prescott

Abstract

The rate of return on capital of U.S. foreign subsidiaries has been much higher than the rate of return on capital of U.S. affiliates of foreign companies. Over the period 1982-2005, the U.S. Bureau of Economic Analysis (BEA) estimates that the difference in returns, after subtracting taxes, averaged 6.3 percent per year. One explanation explored in this paper is the fact that multinationals make large intangible investments that affect profits but are excluded from BEA capital stock measures. Differences in reported returns on foreign direct investment (FDI) could exist if there were differences in the timing and magnitude of these foreign intangible investments. We explore this possibility using a growth model with two types of intangible capital: plant-specific intangible capital and technology capital. Technology capital is accumulated know-how from investments in research and development (R&D), brands, and organizations that can be used in as many available locations as firms choose. As countries open up, there are gains to foreign direct investment with more locations available in which to put technology capital. We choose parameters of our model to mimic the U.S. current accounts and find that the mismeasurement of incomes and capital stocks accounts for a little over half of the difference in reported returns.

Suggested Citation

  • Ellen R. McGrattan & Edward C. Prescott, 2007. "Technology capital and the U.S. current account," Working Papers 646, Federal Reserve Bank of Minneapolis, revised 2007.
    • Handle: RePEc:fip:fedmwp:646
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    References listed on IDEAS

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    1. David Backus & Espen Henriksen & Frederic Lambert & Chris Telmer, 2005. "Current Account Fact and Fiction," 2005 Meeting Papers 115, Society for Economic Dynamics.
    2. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376, National Bureau of Economic Research, Inc.
    3. Alessandra Fogli & Fabrizio Perri, 2006. "The Great Moderation and the U.S. External Imbalance," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 209-225, December.
    4. Enrique G. Mendoza, 2007. "Financial Integration, Financial Deepness and Global Imbalance," 2007 Meeting Papers 746, Society for Economic Dynamics.
    5. Ellen R. McGrattan & Edward C. Prescott, 2005. "Taxes, regulations, and the value of U.S. and U.K. corporations," Staff Report 309, Federal Reserve Bank of Minneapolis.
    6. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    7. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376, National Bureau of Economic Research, Inc.
    8. Ricardo Hausmann & Federico Sturzenegger, 2006. "Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations," CID Working Papers 124, Center for International Development at Harvard University.
    9. Ellen R. McGrattan & Edward C. Prescott, 2005. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 767-796.
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    Cited by:

    1. Jung, Kuk Mo & Pyun, Ju Hyun, 2016. "International reserves for emerging economies: A liquidity approach," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 230-257.

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