Assessing the regional impact of EAFRD spending in Italy: the role of spillover through trade linkages

Purpose This paper examines the dynamic effects of the European Agricultural Fund for Rural Development (EAFRD) in Italy, focusing on the importance of spillover effects through trade-linkages, in the Italian regions. Design/methodology/approach A Local Projections approach is used, constructing a trade-weighted measure of extra-regional EAFRD spending to examine its influence on regional production, as well as the effects of domestic expenditure. Findings The EAFRD has positive dynamic effects on regional output and generates positive spillovers through trade linkages. Ignoring these spillovers, by excluding the trade-weighted foreign expenditure, leads to overestimating the effects of domestic EAFRD expenditure. The study also underscores the importance of the income channel in shaping these spillovers, showing that they are amplified when the source regions experience an expansion rather than a recession. Originality/value This study is the first to assess spillovers through trade linkages related to EAFRD expenditure, employing the proposed empirical approach. It highlights the importance of considering spillovers when evaluating the effects of policies at the regional level. Furthermore, it empirically demonstrates that ignoring spillovers leads to an overestimation of the effects of domestic expenditure. Finally, it is the first to shed light on the importance of the business cycle of the source regions in influencing the spillovers through trade linkages, given the importance of the income channel.