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Domestic Investment and the Cost of Capital in the Caribbean

Author/Editor: Roache, Shaun K.
Authorized for Distribution: June 1, 2006
Electronic Access: Free Full Text (PDF file size is 498KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Investment-to-GDP ratios across the Caribbean tend to be relatively high. In many countries, these ratios have been trending higher since the mid-1990s, largely reflecting public investment and foreign direct investment. Private domestic investors have been less prominent. This may be one reason why such high investment has delivered Caribbean growth rates below the middle-income average. This paper seeks to understand how higher private investment may be encouraged. Using new data, it concludes that: the multiplier effects of public investment and FDI on private domestic investment are weak; and private domestic investment (PDI) is sensitive to the cost of capital. Public policy designed to raise PDI should focus on creating conditions for a lower cost of capital. The focus should be on removing barriers to lower real interest rates, rather than the further extension of costly tax concessions.
 
Series: Working Paper No. 06/152
Subject(s): Investment | Caribbean | Capital | Taxes | Real interest rates
Author's keyword(s): Investment | cost of capital
 
English  
    Published:   June 1, 2006        
    ISBN/ISSN:   0 / 1934-7073   Format:   Paper
    Stock No:   WPIEA2006152   Pages:   44
    Price:   US$15.00
       
     
Please address any questions about this title to publications@imf.org.