Estimating the Effects of the European Agricultural Fund for Rural Development in Italy

Abstract The European Agricultural Fund for Rural Development (EAFRD) is an important part of the European Union's strategies under the Common Agricultural Policy (CAP). It contributes to the development of rural areas through both public and private investments. However, in the short term, there can be ambiguous effects of European funds in these areas. The aim of this paper is to examine the short-term dynamic effects of the EAFRD on the economy of the Italian regions and their agricultural sector. Using a Structural Vector Autoregressive (VAR) model on a panel of 21 NUTS-2 regions, over the period 1995–2018, we find significant positive impacts on both regional economic activity, agricultural sector output and private investment in the agricultural sector. However, EAFRD spending causes temporary job losses in the agricultural sector, highlighting the effects of labour substitution by investments in innovation. The effects are more pronounced in regions with larger agricultural sectors and become stronger after the 2003 Fischler reform.