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Discounting the distant future: How much does model selection affect the certainty equivalent rate?
Author(s) -
Groom Ben,
Koundouri Phoebe,
Panopoulou Ekaterini,
Pantelidis Theologos
Publication year - 2007
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.937
Subject(s) - discounting , economics , context (archaeology) , certainty , affect (linguistics) , work (physics) , constant (computer programming) , climate change , econometrics , microeconomics , computer science , psychology , mathematics , engineering , geography , mechanical engineering , geometry , archaeology , finance , communication , ecology , biology , programming language
Abstract Recent work in evaluating investments with long‐term consequences has turned towards establishing a schedule of Declining Discount Rates (DDRs). Using US data we show that the employment of models that account for changes in the interest rate generating mechanism has important implications for operationalising a theory of DDRs that depends upon uncertainty. The policy implications of DDRs are then analysed in the context of climate change for the USA, where the use of a state space model can increase valuations by 150% compared to conventional constant discounting. Copyright © 2007 John Wiley & Sons, Ltd.