Dynamic macroeconomic effects of public capital: evidence from regional Italian data

This paper assesses the effects of public capital in Italy on the main macroeconomic aggregates: GDP, private capital and labour. A cointegrated vector autoregressive (VAR) model, in line with recent advancements in the field, allows us to take into account the complex nexus of direct and indirect links between the variables. We find a persistent increase in GDP in response to a positive shock to public capital; this result is mainly attributable to a strong stimulus exerted by public infrastructures on private capital (crowding in). The positive effects of public capital are quite pervasive across Italy, albeit to differing extents. In particular, a higher elasticity of GDP to public capital is estimated for the South, whereas marginal productivity turns out to be higher in the Centre-North. This suggests that public capital has a lower economic return in the South, bearing out the existence of a potential conflict between equity and efficiency goals. Finally, we indirectly document the existence of positive spillover effects at the regional level, allowing individual regions to benefit from the endowment of public capital in the rest of the country.