How expected inflation distorts the current account and the valuation effect

Abstract We show that the current account balance (CA) is systematically distorted by an inflation effect, which arises because income on debt recorded as nominal interest in currency of denomination. Since includes compensations for expected inflation, increases latter must impact CA. Guided relevant international accounting rules, we impute effect 50 economies between 1991 and 2017. When adjusting absolute value yearly CAs drops 0.13% GDP average. Over full period, reduction a sizable 22.85% initial average country (26.4% U.S.). As flip side CA distortions, contributes to well-known valuation net foreign assets. For country, accounts twelfth U.S., it well over half.