https://doi.org/10.52903/wp2024328
FROM POLICY TO CAPITAL: ASSESSING THE IMPACT OF STRUCTURAL REFORMS ON GROSS CAPITAL INFLOWS
Christos Mavrogiannis
University of Patras
Athanasios Tagkalakis
Bank of Greece and University of Patras
ABSTRACT
Utilizing a narrative database on structural reforms in 25 OECD countries from 1985 to 2020, we investigate the effects of labor and product market reforms on gross capital inflows. By applying the local projection method and addressing reform endogeneity with the Augmented Inverse Probability Weighted estimator, we find that structural reforms have a positive medium-term effect on both direct and portfolio investment. In particular, reforms boost investment, especially in environments of high quality financial institutions and amid low public debt. Furthermore, building on a new indicator of cabinet policy orientation, we find that newly elected market-oriented cabinets have a positive effect on direct investment inflows. Product market reforms are more conducive to the inflow of direct investment under cabinets that prefer a state-oriented economy. Labor market reforms significantly boost direct investment and portfolio investment under governments favoring a market-oriented economy.
JEL-classifications: F21, F41, J08, L51, O16
Keywords: direct investment, portfolio investment, gross capital inflows, structural reforms, product market reforms, labor market reforms, policy orientation
Acknowledgements: We would like to thank Hiona Balfoussia and Panagiotis Pomonis. The views of the article correspond to the views of the authors and not to the views of the Bank of Greece. We remain solely responsible for any errors and omissions.
Correspondence:
Athanasios Tagkalakis
Economic Analysis and Research Department,
Bank of Greece,
El. Venizelos 21, Athens 10250, Greece.
Tel.: +30-2103202442
Email: atagkalakis@bankofgreece.gr