Public Investment and Growth in the Eastern Caribbean
IMF Working Papers, May 1, 2007
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Bibliographic details
- Authors: Shaun K. Roache
- Published: May 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451866889.001
Summary and Key Finding
- The paper quantifies the effect of public investment on growth in the ECCU.
- Results, emerging from panel vector autoregressions, indicate that the return on public investment, as defined by Perreira (2000), is very likely negative.
- Interpretation: the total change in real output induced by one EC dollar of public investment, due to its short-run impact on demand or the longer-run impact on supply, is below one EC dollar.
- Public investment shocks also appear to appreciate the real exchange rate, suggesting that the short-run demand impact is larger than the long-run supply response.
Methodology
- Empirical approach: panel vector autoregressions.
- Conceptual reference: return on public investment as defined by Perreira (2000).
Substantive Analysis and Implications
- A negative return on public investment implies that public capital spending in the ECCU, on average, does not raise real output by at least the value of the investment in the short and long run combined.
- Real exchange rate appreciation associated with public investment shocks indicates dominant short-run demand effects relative to long-run supply benefits.
- Policy implication (implicit from findings): public investment projects that mainly stimulate short-run demand without durable supply-side productivity gains may be associated with unfavorable output returns and real exchange rate appreciation in the ECCU context.