Groom, Ben and Koundouri, Phoebe and Panopoulou, Ekaterini and Pantelidis, Theologos
Discounting the distant future: How much does model selection affect the certainty equivalent rate?
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.
||Economics Department Working paper series N148/02/05
||Long-run discounting, iterest rate forcasting, state-space models, regime-switching models, climate change policy.
||Social Sciences > Economics, Finance & Accounting
Ms Sandra Doherty
||17 Feb 2005
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