Stimulating Avenues: EIB Loans and Returns to Public Infrastructure

with Evi Pappa

We analyze the economic impact of public investment using European Investment Bank (EIB) loans for infrastructure to publicly owned firms and governments as an instrument for public investment 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 public investment boosts employment, output, and private investment in the medium term without causing inflation and significant effects on consumption and debt-to-GDP. The cumulative output multiplier reaches a maximum of 3.5 five years after the shock and is higher in countries with higher public debt-to-GDP ratios or under favorable financial conditions. Interestingly, the strong crowd-in effect on private investment amplifies the overall impact.