Financial integration and external adjustment

an article by Andreas Fischer, Henrike Leonie Groeger, Philip Sauré and Pınar Yeşin for VOX: CEPR’s Policy Portal

Global imbalances are at the core of today’s trade tensions, but official current account statistics may not be sufficient to assess the external positions of financially integrated economies. For instance, balance of payments accounting standards do not prescribe the recording of retained earnings on portfolio equity investment in the current account.

This column argues that adjustments in income flows in equity investment therefore remain concealed in official current account statistics. In today’s financially integrated world with existing accounting standards, external adjustment mechanisms should be considered more broadly than just as an evolution of trade balance and exchange rate movements.

Figure 1 Countries with large net portfolio equity assets

Sources: IMF CPIS, IMF BOPS, own calculations

Figure 2 Countries with sizeable net portfolio equity liabilities

Sources: IMF CPIS, IMF BOPS, own calculations

Continue reading if only far enough to make sense of the graphs above.

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