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Does capital account liberalisation lead to investment booms in Caribbean economies?

It is often argued that capital account liberalisation has provided the main impetus for significant surge in cross border capital flows over the past two decades. At the same time, literature attests to the fact that capital account liberalisation entails a great deal of risks to developing countries because opening up the capital capital account can be destablising, to the extent that it can increasr the vulnerability of these countries to external shocks through sharp changes in foreign exchange reserves. This paper attempts to empirically examine whether capital account liberalisation stimilates higher capital and financial inflows in Caribbean countries, using data for barbados, Jamaica and Trinidad and Tobago. It also seeks to investigate the extent to which these inflows have translated into investment . The results from the ARDL co-integration, methodology does not give definitive support to the hypothesis that liberalising the capital account leads to increased private capital inflows. However, it provides some evidence that capital flows are significant in explaining the movements in private investment.

WP 2005-9