Université de Lausanne
Ecole des HEC
Département d'économétrie et d'économie politique

DEEP-EPFL Seminars in Macroeconomics

Monday January 14, 2008, à 17:15
Extranef, room 126

Edward C. PRESCOTT
(Federal Reserve Bank of Minneapolis, Research Department,
Arizona State University, Dept of Economics - Nobel Prize in Economics 2004)

Technology Capital and the U.S. Current Account

Abstract
Over the period 1982-2005, the U.S. Bureau of Economic Analysis (BEA) estimates that foreign subsidiaries of U.S. companies earned on average 9.3 percent per year after taxes while subsidiaries of foreign companies operating in the United States earned on average only 3.0 percent. We explore the importance of two factors that can distort these reported 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 as many available locations as firms choose. When countries open up to foreign multinationals' technology capital, foreign profits are generated without any recorded investments, thus inflating returns. Multinationals also make intangible investments that are specific to a plant or location. These investments are expensed and thus lower reported returns, but the capital earns rents which increase reported returns. We develop a multicountry general equilibrium model with a role for FDI to quantify the role of mismeasured intangible investments for reported returns. If parameters are chosen to align the current account of the U.S. and the model, we find that mismeasurement accounts for a little over half of the difference in reported returns.

Web site of the seminar (with paper online): http://www.hec.unil.ch/deep/evenements-english/e-sem-all-2007-08.htm