Discounting the distant future: How much does model selection affect the certainty equivalent rate?
Article first published online: 19 APR 2007
Copyright © 2007 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 22, Issue 3, pages 641–656, April/May 2007
How to Cite
Groom, B., Koundouri, P., Panopoulou, E. and Pantelidis, T. (2007), Discounting the distant future: How much does model selection affect the certainty equivalent rate?. J. Appl. Econ., 22: 641–656. doi: 10.1002/jae.937
- Issue published online: 19 APR 2007
- Article first published online: 19 APR 2007
- Manuscript Revised: 19 MAY 2006
- Manuscript Received: 20 DEC 2004
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.