Twin balances, public governance and private investment: Quantile estimation for OECD countries

Abstract

This paper examines the twin influences of fiscal balance and trade balance on the dynamics of private investment at times of institutional change. Applying quantile regression for panel data of 31 OECD countries in the period 2002–2017, the study contributes in three ways: 1) degradations of fiscal balances and trade balances have clear negative impacts on private investment; 2) improvements in public governance appear as a strong incentive for private investment; notably, better public governance constrains the negative impacts of the twin balances on private investment; 3) countries with higher institutional quality enjoy a positive net effect of the fiscal balance, while the negative net effect of the trade balance is reduced. This study has significant implications, advocating institutional improvement to stabilize private investment in OECD countries.