General Equilibrium Effects of Investment Incentives in Mexico

Posted: 30 Dec 2005

See all articles by Andrew Feltenstein

Andrew Feltenstein

Georgia State University - Department of Economics

Anwar Shah

World Bank

Abstract

Mexico has experimented with a number of tax instruments designed to promote private capital formation. Among such initiatives are general and industry specific tax credits, employment tax credits, and corporate tax reductions. This paper examines the relative efficacy of such instruments using a dynamic computable general equilibrium model. Model simulations with Mexican data are carried out using three equal yield investment incentive scenarios. We find that a corporate tax reduction has the most stimulative impact on investment. The results emphasize the importance of using an open economy model. Unlike, for example, investment tax credits, tax rate reductions increase the demand for all capital rather than new capital alone. Hence the public increases its holdings of domestic debt, causing the price of domestic bonds to rise, real interest rates to fall, and domestic investment to increase.

Keywords: Mexico, Investment incentives, General equilibrium

JEL Classification: H3, O2

Suggested Citation

Feltenstein, Andrew and Shah, Anwar, General Equilibrium Effects of Investment Incentives in Mexico. Journal of Development Economics, Vol. 46, No. 2, pp. 253-269, April 1995. Available at SSRN: https://ssrn.com/abstract=872441

Andrew Feltenstein (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
404-4130093 (Phone)

Anwar Shah

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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