Public debt and aggregate investment in the EU

In this paper, I study the public debt-aggregate investment nexus in a panel of EU countries. The empirical approach is based on the common factor framework, which allows accounting for cross-country heterogeneity and cross-sectional dependence. The empirical results indicate that public debt has, on average, an adverse effect that is more pronounced in the public investment case. Moreover, there are evidence indicating the presence of a nonlinear relationship between debt and investment.