Stimulating Avenues: EIB Loans and Returns to Public Infrastructure

with Evi Pappa

We analyze the economic impact of public infrastructure investment using European Investment Bank (EIB) loans to publicly owned firms and governments as an instrument for infrastructure shocks. To address endogeneity in loan approval, we apply the Inverse- Probability-Weighted Regression-Adjustment (IPWRA) estimator and a local projection IV approach. Our findings show that infrastructure investment boosts employment, output, and private investment in the medium term without causing inflation. The output multiplier peaks at seven two years after the shock, with larger effects in countries with higher debt-to-GDP ratios, public investment, corruption, and poor governance. Interestingly, in such countries, public investment strongly crowds in private investment, amplifying the overall impact.