Confidence as a Driver of Private Investment in Selected Countries of Central America

By Carlos Janada, Iulia Ruxandra Teodoru

December 4, 2020

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Carlos Janada, and Iulia Ruxandra Teodoru. Confidence as a Driver of Private Investment in Selected Countries of Central America, (USA: International Monetary Fund, 2020) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper argues that structural weaknesses may make private investment particularly sensitive to business confidence relative to other traditional investment drivers and global shocks. It gauges the importance of confidence over recent years in selected countries in Central America, including Costa Rica, the Dominican Republic, El Salvador, and Guatemala. Using a vector error correction model to carry out the empirical work, a system representing global activity and the domestic economy, including a set of investment drivers (interest rates, unit labor costs, and confidence) is analyzed. The findings suggest that confidence has been, on average, the most important driver of investment in these countries, exceeded only by global factors. Since confidence, arguably, can be influenced by policymakers’ decisions, structural reforms to improve the business climate and reduce uncertainty play an important role in promoting investment and economic growth.

Subject: Economic sectors, Financial crises

Keywords: Confidence, Determinants of investment, Uncertainty, VAR, VECM

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/270
Stock No:

WPIEA2020270
ISBN:

9781513563275
ISSN:

1018-5941

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