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Technology capital and the U.S. current account

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  • Ellen R. McGrattan
  • Edward C. Prescott

Abstract

The U.S. Bureau of Economic Analysis (BEA) estimates the return on investments of foreign subsidiaries of U.S. multinational companies over the period 1982?2006 averaged 9.4 percent annually after taxes; U.S. subsidiaries of foreign multinationals averaged only 3.2 percent. Two factors distort BEA returns: technology capital and plant-specific intangible capital. Technology capital is accumulated know-how from intangible investments in R&D, brands, and organizations that can be used in foreign and domestic locations. Used abroad, it generates profits for foreign subsidiaries with no foreign direct investment (FDI). Plant-specific intangible capital in foreign subsidiaries is expensed abroad, lowering current profits on FDI and increasing future profits. We develop a multicountry general equilibrium model with an essential role for FDI and apply the BEA?s methodology to construct economic statistics for the model economy. We estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in BEA returns.

Suggested Citation

  • Ellen R. McGrattan & Edward C. Prescott, . "Technology capital and the U.S. current account," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:406
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    References listed on IDEAS

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    13. McGrattan, Ellen R. & Prescott, Edward C., 2009. "Openness, technology capital, and development," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2454-2476, November.
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    Cited by:

    1. 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.
    2. Thomas J. Holmes & Ellen R. McGrattan & Edward C. Prescott, 2011. "Technology capital transfer," Working Papers 687, Federal Reserve Bank of Minneapolis.
    3. McGrattan, Ellen R. & Prescott, Edward C., 2009. "Openness, technology capital, and development," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2454-2476, November.
    4. Barry Bosworth & Susan Collins & Gabriel Chodorow-Reich, "undated". "Returns on FDI. Does the U.S. Really Do Better?," Working Paper 90801, Harvard University OpenScholar.
    5. Ellen R. McGrattan & Edward C. Prescott, . "Openness, technology capital, and development," Staff Report, Federal Reserve Bank of Minneapolis.
    6. Prescott, E.C., 2016. "RBC Methodology and the Development of Aggregate Economic Theory," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1759-1787, Elsevier.
    7. George-Marios Angeletos & Vasia Panousi, 2011. "Financial Integration, Entrepreneurial Risk and Global Imbalances," NBER Working Papers 16761, National Bureau of Economic Research, Inc.
    8. Leonard I. Nakamura, 2010. "Intangible Assets And National Income Accounting," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 135-155, June.
    9. Edward C. Prescott, . "RBC Methodology and the Development of Aggregate Economic Theory," Staff Report, Federal Reserve Bank of Minneapolis.
    10. Chen, Kaiji & Imrohoroglu, Ayse & Imrohoroglu, Selahattin, 2009. "A quantitative assessment of the decline in the U.S. current account," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1135-1147, November.

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