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Domestic Investment and the Cost of Capital in the Caribbean

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  • Shaun K. Roache
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    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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    Bibliographic Info

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

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    Length: 44
    Date of creation: 01 Jun 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/152

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    Keywords: Taxes; Real interest rates; cost of capital; capital stock; public investment; capital goods; capital formation; investors; private investment; domestic investment; corporate tax; tax rate; credit rationing; private capital; domestic capital; corporate tax rate; investment rate; risk premium; capital equipment; capital base; capital asset; capital asset pricing model; equity risk premium; capital markets; capital asset pricing; tax policy; foreign direct investment; investment behavior; fixed capital; corporate tax rates; direct investment; gross fixed capital formation; foreign investors; foreign capital; depreciable capital; private investors; international finance; business investment; capital gains; capital accounts; capital ratio; capital accumulation; stock market; interest payments; capital market; multiplier effect; investment incentives; outstanding debt; nominal interest rates; capital market volatility; investment activity; credit market; risk exposure; government bonds; capital theory; retained earnings; capital good; liquid capital; corporate tax burden; foreclosure laws; gross capital formation; investment decisions; corporate taxation; inflation rate; capital gain; capital depreciation; consumer price index; income tax rate; stock exchange; investment spending; nominal capital; investment climate; business taxation; investment functions; intangible assets; tax system; equity investment; capital spending; equity capital; corporate taxes; business taxes;

    References

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    Cited by:
    1. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Asset prices, Credit and Investment in Emerging Markets," NIPE Working Papers 18/2009, NIPE - Universidade do Minho.
    2. Shaun K. Roache, 2007. "Public Investment and Growth in the Eastern Caribbean," IMF Working Papers 07/124, International Monetary Fund.

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