In this seminar Juha Tervala will analyse the welfare multipliers of public spending — the consumption equivalent change in welfare for a one dollar change in public spending — in a DSGE model.The welfare multiplier of public investment depends crucially not only on the productivity (output elasticity) of public capital, as shown by earlier studies, but also on the depreciation rate of public capital and the efficiency of public investment defined as a fraction of public investment spending that translates into the public capital stock.

Dr Tervala shows that when the key parameter values are set based on the empirical estimates for advanced economies and the output multipliers are consistent with the empirical estimates, the welfare multiplier is positive and sizable. The welfare multiplier is roughly zero when the key parameter values are set to match the features of developing economies. Dr Tervala concludes that a public infrastructure push in advanced economies makes sense, but developing economies should enhance the efficiency and/or productivity of public investment.

Juha Tervala is the director of the Bachelor’s Programme in Economics of the University of Helsinki, Finland. His main field of research is international macroeconomics. Most of his studies address the transmission of monetary and fiscal policy in new Keynesian DSGE models. He has published, for example, in the Journal of Economic Dynamics and Control, the IMF Economic Review, the Journal of International Money and Finance, and Economics Letters.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.