Yes, We Should Discount the Far-Distant Future at its Lowest Possible Rate: A Resolution of the Weitzman-Gollier Puzzle

Freeman, Mark

doi:10.2139/ssrn.1726744

Cited by 5 publications

(2 citation statements)

References 30 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…there is no 50 or 100 year window in which the null hypothesis of a unit root can be rejected. 13 A comparison of Figures 1 and 2 with Figures 3 and 4 shows that, whatever the theoretical justification, smoothing the data inevitably increases persistence in the series.…”

Section: Historical Data On Us Interest Ratesmentioning

confidence: 85%

See 1 more Smart Citation

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Freeman

Groom

Panopoulou

et al. 2015

Journal of Environmental Economics and Management

Self Cite

View full text Add to dashboard Cite

Uncertain and persistent real interest rates underpin one argument for using a declining term structure of social discount rates in the Expected Net Present Value (ENPV) framework. Despite being controversial, this approach has influenced both the Inter-Agency Working Group on Cost-Benefit Analysis and the UK government's guidelines on discounting. We first clarify the theoretical basis of the ENPV approach. Then, rather than following previous work which used a single series of U.S. Treasury bond returns, we treat nominal interest rates and inflation as co-integrated series and estimate the empirical term structure of discount rates via the 'Fisher Effect'. This nests previous empirical models and is more flexible. It also addresses an irregularity in previous work which used data on nominal interest rates until 1950, and real interest rates thereafter. As we show, the real and nominal data have very different time series properties. This paper therefore provides a robustness check on previous discounting advice and updated methodological guidance at a time when governments around the world are reviewing their guidelines on social discounting. The policy implications are discussed in the context of the Social Cost of Carbon, nuclear decommissioning and public health.JEL: Q48, C13, C53, E43

show abstract

Section: Historical Data On Us Interest Ratesmentioning

confidence: 85%

“…[PLACE TABLES 1 -3 HERE] 13 The rolling ADF test is undertaken without a trend component, although similar results arise when the trend is included.…”

Section: Historical Data On Us Interest Ratesmentioning

confidence: 92%

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Freeman

Groom

Panopoulou

et al. 2015

Journal of Environmental Economics and Management

Self Cite

View full text Add to dashboard Cite

show abstract

Expected net present value, expected net future value, and the Ramsey rule

Gollier

2010

Journal of Environmental Economics and Management

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Weitzman (1998) showed that when future interest rates are uncertain, using the expected net present value implies a term structure of discount rates that is decreasing to the smallest possible interest rate. On the contrary, using the expected net future value criterion implies an increasing term structure of discount rates up to the largest possible interest rate. We reconcile the two approaches by introducing risk aversion and risk-neutral probabilities. We show that if the aggregate consumption path is optimized, the two criteria are equivalent. Moreover, they are also equivalent to the Ramsey rule extended to uncertainty. Terms of use: Documents in EconStor mayJEL Code: D61.

show abstract

How Should the Distant Future Be Discounted When Discount Rates are Uncertain?

Gollier

Weitzman

2009

SSRN Journal

View full text Add to dashboard Cite

It is not immediately clear how to discount distant-future events, like climate change, when the distant-future discount rate itself is uncertain. The so-called "Weitzman-Gollier puzzle" is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results with the opposite policy implications. We explain how the "Weitzman-Gollier puzzle" is resolved. When agents optimize their consumption plans and probabilities are adjusted for risk, the two approaches are identical. What we would wish a reader to take away from this paper is the bottom-line message that the appropriate long run discount rate declines over time toward its lowest possible value.

show abstract

Yes, We Should Discount the Far-Distant Future at its Lowest Possible Rate: A Resolution of the Weitzman-Gollier Puzzle

Cited by 5 publications

References 30 publications

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Expected net present value, expected net future value, and the Ramsey rule

How Should the Distant Future Be Discounted When Discount Rates are Uncertain?

Contact Info

Product

Resources

About