From policy to capital: assessing the impact of structural reforms on gross capital inflows

Christos Mavrogiannis and Athanasios Tagkalakis
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Christos Mavrogiannis: University of Patras

No 328, Working Papers from Bank of Greece

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.

Keywords: direct investment; portfolio investment; gross capital inflows; structural reforms; product market reforms; labor market reforms; policy orientation (search for similar items in EconPapers)
JEL-codes: F21 F41 J08 L51 O16 (search for similar items in EconPapers)
Pages: 62
Date: 2024-04
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