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

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  • Iulia Ruxandra Teodoru

Abstract

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.

Suggested Citation

  • Iulia Ruxandra Teodoru, 2020. "Confidence as a Driver of Private Investment in Selected Countries of Central America," IMF Working Papers 2020/270, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/270
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    Cited by:

    1. Jože Damijan & Jozef Konings & Črt Kostevc & Katja Zajc Kejžar, 2022. "Explaining the Low Level of Investment in Slovenia," European Economy - Discussion Papers 169, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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