Stimulating Avenues: EIB Loans and Returns to Public Investment

with Evi Pappa

We study the macroeconomic effects of public investment news shocks using a local projection instrumental-variables framework and European data. To identify news, we exploit European Investment Bank loans for public infrastructure projects and address potential endogeneity in loan approval with an inverse-probability-weighted regressionadjustment estimator. Public investment news shocks raise employment and output, and to a lesser extent private investment, in the medium term, without generating inflation, increasing the debt burden, or crowding out consumption. The cumulative output multiplier reaches 3.38 after five years and is significant and larger when credit conditions are favorable. Using long data for Spain, we show that, absent narrative information, shocks identified through maximum forecast-error restrictions yield similar multipliers