Domestic Investment and the Cost of Capital in the Caribbean

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Domestic Investment and the Cost of Capital in the Caribbean

Author Info

Shaun K. Roache

Abstract

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/152.

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Length: 44 pages
Date of creation: 26 Jun 2006
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Handle: RePEc:imf:imfwpa:06/152

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Shaun K. Roache, 2007. "Public Investment and Growth in the Eastern Caribbean," IMF Working Papers 07/124, International Monetary Fund. [Downloadable!]

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