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International Monetary Fund

(Section III), would account for part of the decline in trade openness. Cross-country studies typically associate such a decline with a slowdown in economic growth. 2 Private domestic investment has also fallen sharply since 1996. This may reflect the real financing cost of capital for the St. Lucian private sector, which has been rising and has tended to be higher than in the rest of the ECCU ( Box 1 ). Labor market rigidities may also have slowed structural change. While average real wage growth outstripped productivity growth in the early 1990s, leading to a

International Monetary Fund
This Selected Issues paper analyzes the income dispersion and comovement in the Eastern Caribbean Currency Union region. It finds that incomes are diverging, with the Leeward Islands converging to a higher income level than the Windward Islands. The paper examines the macroeconomic impact of trade preference erosion on the Windward Islands and demonstrates the substantial impact from preference erosion on growth, trade balances, and fiscal positions. The paper also analyzes the size of the informal economy in the Caribbean.
Mr. Shaun K. Roache

Growth and Gross Investment-to-GDP Ratios, 1995–2004 2. Investment Trends in the CARICOM Area—Three-Year Moving Averages 3. Caribbean: Private Investment Rate and Economic Depreciation, 1985–2004 4. Caribbean: Financing Cost of Capital, 1980–2004 5. Estimated Debt-to-Capital Ratios for Private Domestic Investors (Percent) 6. Components of Weighted-Average Real Cost of Capital Appendix: Data Sources and Estimates A. Capital Stock Data—Issues and Measurement B. Real User Weighted-Average Cost of Capital C. Tax Factors D. Summary Statistics E. Unit

International Monetary Fund

deflated. 121. The financing cost of capital appears to have been rising in many countries, reflecting debt, equity, depreciation, and taxation ( Figure V.3 ) . In the absence of a deep and liquid corporate debt and stock market, estimates for the cost of debt and equity from standard approaches, such as the capital asset pricing model (CAPM), are difficult to obtain. There is also no consensus on what assets should be used when estimating the cost of equity. To overcome the lack of financial markets, weighted average country CAPM betas were constructed using global

Mr. Shaun K. Roache

− ω α ˜ ) ∑ v = t + 1 T ( 1 + r ) t − v u T − 1 ( 5 ) where in the above equations: r ≡ nominal weighted average financing cost of capital (debt and equity) u ≡ corporate tax rate p ≡ output price p K ≡ capital goods price w ≡ nominal wage N ≡ labor Γ ≡ present value of tax benefits for investment η ≡ investment tax credit rate, in the form of a rebate/direct grant θ ≡ proportion of tax credit that reduces

Mr. Shaun K. Roache
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.
International Monetary Fund
St. Lucia showed strong growth performance owing to its strong investment in tourism infrastructure. Executive Directors commended the prudent public debt management and sound banking system. They underscored the need for fiscal consolidation and steps to promote domestic investment and labor market flexibility. They appreciated the well-designed disaster prevention and mitigation framework, and urged the need to reduce unemployment, reverse the rapid rise in public debt, and encouraged authorities to improve the timeliness and accuracy of data for economic analysis and policymaking.