Public investment via EIB loans yields high output multipliers

The paper employs a local-projection instrumental-variables framework with European data to study the macroeconomic effects of public investment shocks.

For identification, it exploits European Investment Bank (EIB) loans for public infrastructure projects, addressing potential endogeneity in loan approval using an inverse-probability-weighted regression adjustment estimator.

Public investment shocks are found to significantly raise employment and output in the medium term.

Crucially, these shocks do not crowd out private investment or consumption, nor do they generate inflation or an additional debt burden.

The cumulative output multiplier reaches 3.38 after five years, becoming significant and larger when credit conditions are favorable.

The study also reports significant positive spillover effects from public infrastructure spending on both output and employment, driven by factors like improved knowledge diffusion and reduced trade costs.

This research challenges the conventional view of public infrastructure investment having only modest short-run effects, instead revealing sizeable medium-term impacts using quarterly European data.

The paper attributes its higher multipliers to several key factors.

These include a specific focus on public investment rather than total government spending, the euro area's centralized monetary policy limiting offsetting interest-rate responses, and the reliance on external EIB funding which mitigates domestic crowding-out.

The persistence of the identified shocks and a labor-supply shift, allowing employment expansion without raising unit labor costs, also contribute to these significant medium-term multipliers.