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Discounting the distant future: How much does model selection affect the certainty equivalent rate?

Groom, Ben and Koundouri, Phoebe and Panopoulou, Ekaterini and Pantelidis, Theologos (2004) Discounting the distant future: How much does model selection affect the certainty equivalent rate? UNSPECIFIED. (Unpublished)

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Abstract

Evaluating investment with long-term consequences using discount rates that decline with the time horizon. (Declining Discount Rates of DDRs) means that future welfare changes are of greater consequence in present value terms. Recent work in this area has turned towards operationalising the theory and establishing a schedule of DDRs for use in cost benefit analysis. Using US data we make the following points concerning this transition: i) model selectionhas important implications for operationalising a theory of DDRs that depends upon uncertainty; ii) misspecification testing naturally leads to employing models that account for changes in the interest reat generating medanism. Lastly, we provide an analysis of the policy implications of DDRs in the context of climate change for the US and show that the use of a state space model can increase valuations by 150% compared to conventional constant discounting.

Item Type: Other
Additional Information: Economics Department Working paper series N148/02/05
Keywords: Long-run discounting, iterest rate forcasting, state-space models, regime-switching models, climate change policy.
Subjects: Social Sciences > Economics
Item ID: 204
Depositing User: Ms Sandra Doherty
Date Deposited: 17 Feb 2005
Refereed: No
URI:

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