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

Author

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  • 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.

Suggested Citation

  • Christos Mavrogiannis & Athanasios Tagkalakis, 2024. "From policy to capital: assessing the impact of structural reforms on gross capital inflows," Working Papers 328, Bank of Greece.
    • Handle: RePEc:bog:wpaper:328
    DOI: 10.52903/wp2024328
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    More about this item

    Keywords

    direct investment; portfolio investment; gross capital inflows; structural reforms; product market reforms; labor market reforms; policy orientation;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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