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

Abstract

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.

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