Domestic Investment and the Cost of Capital in the Caribbean

June 1, 2006

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Shaun K. Roache Domestic Investment and the Cost of Capital in the Caribbean, (USA: International Monetary Fund, 2006) accessed November 24, 2024

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.

Subject: Private investment, Public investment and public-private partnerships (PPP), Public investment spending, Real interest rates, Stocks

Keywords: Capital base, Cost of capital, Credit rationing, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/152
Stock No:

WPIEA2006152
ISBN:

9781451864120
ISSN:

1018-5941

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