## The Measurement of External Accounts

_IMF Working Papers, June 28, 2019_

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**Canonical URL:** [The Measurement of External Accounts](https://www.imf.org/en/publications/wp/issues/2019/06/28/the-measurement-of-external-accounts-46949)

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## Bibliographic details
- Authors: Gustavo Adler, Daniel Garcia-Macia, Signe Krogstrup
- Published: June 28, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498317450.001

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### Overview
- Authors: Gustavo Adler, Daniel Garcia-Macia, Signe Krogstrup
- Date: June 28, 2019
- Paper series: IMF Working Papers; Working Paper No. 2019/132
- Core summary:
  - Growing international integration in trade and finance can challenge the measurement of external accounts.
  - The paper presents a unified conceptual framework to identify sources of mismeasurement of foreign investment income in current account balances.
  - The framework yields a precise definition of measurement distortions and an empirical strategy to estimate their importance.
  - As an application, two specific distortions related to inflation and retained earnings on portfolio equity are empirically estimated for a broad set of countries.
  - Findings indicate these distortions may explain a non-trivial share of current account imbalances and are particularly relevant in countries with large external investment positions.
  - The paper also discusses how merchanting and profit-shifting activities could produce measurement distortions.
  - The authors suggest areas for future research and underline the need to strengthen data collection efforts.

### Conceptual framework and empirical strategy
- Purpose:
  - Provide a unified conceptual framework for identifying sources of mismeasurement of foreign investment income in current account balances.
- Outputs of the framework:
  - A precise definition of measurement distortions.
  - An empirical strategy for estimating the importance of these distortions.

### Empirical application and key findings
- Distortions empirically estimated:
  - Inflation-related distortion on foreign investment income.
  - Retained earnings distortion on portfolio equity.
- Scope:
  - Estimated for a broad set of countries.
- Main empirical findings:
  - These two distortions may explain a non-trivial share of current account imbalances.
  - Distortions are particularly relevant in countries with large external investment positions.

### Other potential measurement distortions discussed
- Merchanting activities as a potential source of measurement distortion.
- Profit-shifting activities as a potential source of measurement distortion.

### Policy recommendations and research agenda
- Strengthen data collection efforts to better measure foreign investment income and reduce measurement distortions.
- Areas suggested for future research (as discussed by the authors):
  - Further exploration of inflation-related measurement issues.
  - Deeper analysis of retained earnings and portfolio equity accounting across jurisdictions.
  - Investigation of merchanting and profit-shifting channels and their measurement implications.

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_Source: https://www.imf.org/en/publications/wp/issues/2019/06/28/the-measurement-of-external-accounts-46949_