IDEAS home Printed from
   My bibliography  Save this article

Domestic Investment and the Cost of Capital in the Caribbean


  • Shaun K. Roache



Investment rates across the Caribbean tend to be high and have been rising, reflecting increased public investment and FDI. 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 public investment and FDI multipliers on private domestic investment (PDI) are weak. Also, PDI is sensitive to the cost of capital; policies designed to raise PDI should focus on reducing these costs rather than the multiplier effects of public spending.

Suggested Citation

  • Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).
  • Handle: RePEc:eaa:aeinde:v:6:y:2006:i:3_9

    Download full text from publisher

    File URL:
    Download Restriction: Access restricted to subscribers. Free on line subscription for universities from low income countries. More information at

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 04/224, International Monetary Fund.
    2. Michael McMahon & Gabriel Sterne & Jamie Thompson, 2005. "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England.
    3. Hasan Bakhshi & Nicholas Oulton & Jamie Thompson, 2003. "Modelling investment when relative prices are trending: theory and evidence for the United Kingdom," Bank of England working papers 189, Bank of England.
    4. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
    5. Sebastian Sosa, 2006. "Tax Incentives and Investment in the Eastern Caribbean," IMF Working Papers 06/23, International Monetary Fund.
    6. Lederman, Daniel & Menendez, Ana Maria & Perry, Guillermo & Stiglitz, Joseph, 2003. "Mexican investment after the Tequila crisis: basic economics, "confidence" effects or market imperfections?," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 131-151, February.
    7. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers 1320, Econometric Society.
    8. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. "Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty," Manchester School, University of Manchester, vol. 68(3), pages 276-300, June.
    9. A. Estache & M.E. Pinglo, 2005. "Are returns to private infrastructure in developing countries consistent with risks since the Asian crisis?," Competition and Regulation in Network Industries, Intersentia, vol. 6(1), pages 47-75, September.
    10. Jan Dehn, 2000. "Private Investment in Developing Countries: The Effects of Commodity Shocks and Uncertainty," Economics Series Working Papers WPS/2000-11, University of Oxford, Department of Economics.
    11. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    12. Goolsbee, Austan, 2000. "The Importance of Measurement Error in the Cost of Capital," National Tax Journal, National Tax Association, vol. 53(2), pages 215-228, June.
    13. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    14. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    15. Goolsbee, Austan, 2000. "The Importance of Measurement Error in the Cost of Capital," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 215-28, June.
    16. Jan Dehn, 2000. "Private investment in developing countries: The effects of commodity shocks and uncertainty," CSAE Working Paper Series 2000-11, Centre for the Study of African Economies, University of Oxford.
    17. R. Vergara, 2010. "Taxation and private investment: evidence for Chile," Applied Economics, Taylor & Francis Journals, vol. 42(6), pages 717-725.
    18. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, vol. 91(361), pages 106-121, March.
    19. Rama, Martin, 1990. "Empirical investment equations in developing countries," Policy Research Working Paper Series 563, The World Bank.
    20. Anusha Chari & Peter Blair Henry, 2004. "Is the Invisible Hand Discerning or Indiscriminate? Investment and Stock Prices in the Aftermath of Capital Account Liberalizations," NBER Working Papers 10318, National Bureau of Economic Research, Inc.
    21. Schiantarelli, F. & Georgoutsos, D., 1990. "Monopolistic competition and the Q theory of investment," European Economic Review, Elsevier, vol. 34(5), pages 1061-1078, July.
    22. Oshikoya, Temitope W, 1994. "Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 42(3), pages 573-596, April.
    23. Colin Ellis & Simon Price, 2004. "UK Business Investment and the User Cost of Capital," Manchester School, University of Manchester, vol. 72(s1), pages 72-93, September.
    24. Austan Goolsbee, 2000. "The Importance of Measurement Error in the Cost of Capital," NBER Working Papers 7558, National Bureau of Economic Research, Inc.
    25. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    26. Raj Chetty, 2004. "Interest Rates and Backward-Bending Investment," NBER Working Papers 10354, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Shaun K. Roache, 2007. "Public Investment and Growth in the Eastern Caribbean," IMF Working Papers 07/124, International Monetary Fund.
    2. 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.

    More about this item

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eaa:aeinde:v:6:y:2006:i:3_9. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (M. Carmen Guisan). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.