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Technology capital and the U.S. current account

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Listed author(s):
  • 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.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 646.

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Date of creation: 2007
Handle: RePEc:fip:fedmwp:646
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Keywords: Econometric models;

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Find related papers by JEL classification:
  • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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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. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1495-1530.
  3. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," American Economic Review, American Economic Association, vol. 93(2), pages 392-397, May.
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  7. Ellen R. McGrattan & Edward C. Prescott, 2010. "Technology Capital and the US Current Account," American Economic Review, American Economic Association, vol. 100(4), pages 1493-1522, September.
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  12. 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.
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  15. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 11-66 National Bureau of Economic Research, Inc.
  16. 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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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Market Power versus Price-taking in Economic Growth
    by dvollrath in The Growth Economics Blog on 2015-06-05 21:13:53
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    by dvollrath in The Growth Economics Blog on 2015-06-13 18:42:51
  3. 'What Assumptions Matter for Growth Theory?'
    by Mark Thoma in Economist's View on 2015-06-14 09:35:37
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