Financial reforms are preceded by above normal revenues and expenditures (cyclically adjusted)
with no specific focus on social benefits.
5 The direct impact of reforms on business and consumer confidence
As final step of the analysis now a closer look is taken at the direct impact of reforms on the
economic sentiment of consumers and companies. Reforms may reach sentiment via an indirect
and a direct channel. The indirect impact results from reforms’ impact on growth, employment
and other economic variables which, in turn, bear upon the mood of consumers and companies.
The tests of section 3.2 can be understood as a test for the existence of any such indirect effect
(which turned out to be positive for tax and product market reform and negative for labour and
financial market reform).
The direct impact is related to expectations about reforms’ effects before these effects have
materialized. In a sense, the measurement of the direct impact resembles a test on the economic
agents’ perception about the economic merits of reforms. A positive (negative) sign would
indicate that agents share the view that liberalizing reform will foster (reduce) economic well-
being. There is no doubt that this perception issue is also of fiscal importance. A significant
positive expectation effect is a sign that the reform as such stabilizes expectations and, as a
consequence, strengthens demand and the budgetary situation.
To test for direct expectation effects the dependent variable - the standardized consumer and
business sentiment indicators - are regressed on the lagged endogenous variable, the reform
variable (the change in the regulatory index) and a number of standard business cycle and fiscal
variables: GDP growth, change in unemployment, the inflation rate, the level and change of the
(cyclically adjusted) government balance. An instrumental variable specification is estimated in
order to cope with the clearly present reversed causality problem. 60
Tables 6 and 7 summarize the regression results for business and consumer confidence. Apart
from the highly significant autoregressive term, sentiment is driven by growth, the inflation rate
(more pronounced for consumer than for business sentiment), the change in the unemployment
60 Variables mainly related to long-run structural growth potential of an economy are employed as instruments: population share below the age of
14, the fertility rate, the openness, the labour force participation rate, unlit labour costs, the debt GDP level and a dummy for a general election.
155
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