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

32 Pages Posted: 26 Jan 2021

See all articles by Carlos Janada

Carlos Janada

International Monetary Fund (IMF)

Iulia Ruxandra Teodoru

International Monetary Fund (IMF)

Date Written: December 2020

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.

JEL Classification: E22, J30, C30, C22, G20

Suggested Citation

Janada, Carlos and Ruxandra Teodoru, Iulia, Confidence as a Driver of Private Investment in Selected Countries of Central America (December 2020). IMF Working Paper No. 2020/270, Available at SSRN: https://ssrn.com/abstract=3772474

Carlos Janada (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Iulia Ruxandra Teodoru

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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