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

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  • Gollier, Christian

Abstract

Weitzman [1] 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 criteria 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 utility maximization. We show that if the aggregate consumption path is optimized and made flexible to news about future interest rates, the two criteria are equivalent. Moreover, they are also equivalent to the Ramsey rule extended to uncertainty.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 59 (2010)
Issue (Month): 2 (March)
Pages: 142-148

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Handle: RePEc:eee:jeeman:v:59:y:2010:i:2:p:142-148

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Web page: http://www.elsevier.com/locate/inca/622870

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Keywords: Discount rate Ramsey rule Climate change Cost-benefit analysis;

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References

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  1. Ekaterini Panopoulou & Ben Groom & Phoebe Koundouri & Theologos Pantelidis, 2004. "An Econometric Approach To Estimating Long-Run Discount Rates," Royal Economic Society Annual Conference 2004, Royal Economic Society 70, Royal Economic Society.
  2. Gollier, Christian, 2004. "The Consumption-Based Determinants of the Term Structure of Discount Rates," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 296, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Gollier, Christian, 2009. "Should we Discount the Far-Distant Future at its Lowest Possible Rate?," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 3(25), pages 1-14.
  4. Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 46(1), pages 52-71, July.
  5. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, Springer, vol. 37(2), pages 171-186, December.
  6. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1102-1130, September.
  7. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 36(3), pages 201-208, November.
  8. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, Elsevier, vol. 85(2), pages 149-166, August.
  9. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 260-271, March.
  10. GOLLIER Christian & KOUNDOURI Phoebe & PANTELIDIS Theologos, 2008. "Declining Discount Rates : Economic Justifications and Implications for Long-Run Policy," LERNA Working Papers, LERNA, University of Toulouse 08.17.261, LERNA, University of Toulouse.
  11. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, Elsevier, vol. 1(2), pages 85-89, June.
  12. Wolfgang Buchholz & Jan Schumacher, 2008. "Discounting the Long-Distant Future: A Simple Explanation for the Weitzman-Gollier-Puzzle," CESifo Working Paper Series, CESifo Group Munich 2357, CESifo Group Munich.
  13. Hepburn, Cameron & Groom, Ben, 2007. "Gamma discounting and expected net future value," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 53(1), pages 99-109, January.
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Citations

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Cited by:
  1. Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," TSE Working Papers, Toulouse School of Economics (TSE) 09-107, Toulouse School of Economics (TSE).
  2. Nicole El Karoui & Mohamed Mrad & Caroline Hillairet, 2014. "Ramsey Rule with Progressive utility and Long Term Affine Yields Curves," Papers, arXiv.org 1404.1913, arXiv.org.
  3. Freeman, Mark C., 2009. "Yes, we should discount the far-distant future at its lowest possible rate: a resolution of the Weitzman-Gollier puzzle," Economics Discussion Papers, Kiel Institute for the World Economy 2009-42, Kiel Institute for the World Economy.
  4. Traeger, Christian P., 2013. "Discounting under uncertainty: Disentangling the Weitzman and the Gollier effect," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 66(3), pages 573-582.
  5. Cucchiella, Federica & D’Adamo, Idiano, 2012. "Feasibility study of developing photovoltaic power projects in Italy: An integrated approach," Renewable and Sustainable Energy Reviews, Elsevier, Elsevier, vol. 16(3), pages 1562-1576.
  6. GOLLIER Christian, 2008. "Should we discount the far-distant future at its lowest possible rate?," LERNA Working Papers, LERNA, University of Toulouse 08.30.274, LERNA, University of Toulouse.
  7. Traeger, Christian P., 2012. "What’s the Rate? Disentangling the Weitzman and the Gollier Effect," CUDARE Working Paper Series, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy 1121, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  8. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2014. "Ramsey Rule with Progressive Utility in Long Term Yield Curves Modeling," Working Papers, HAL hal-00974815, HAL.
  9. Gouel, Christophe & Jean, Sebastien, 2012. "Optimal food price stabilization in a small open developing country," Policy Research Working Paper Series, The World Bank 5943, The World Bank.
  10. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 20906, Hamburg University, Department of Economics.
  11. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2014. "Ramsey Rule with Progressive Utility in Long Term Yield Curves Modeling," Papers, arXiv.org 1404.1895, arXiv.org.
  12. Nicole El Karoui & Mohamed Mrad & Caroline Hillairet, 2014. "Ramsey Rule with Progressive utility and Long Term Affine Yields Curves," Working Papers, HAL hal-00974831, HAL.
  13. Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2012. "Exponential Discounting Bias," Working Papers Series 2, ISCTE-IUL, Business Research Unit (BRU-IUL) 12-05, ISCTE-IUL, Business Research Unit (BRU-IUL).
  14. Freeman, Mark C., 2010. "Yes, we should discount the far-distant future at its lowest possible rate: A resolution of the Weitzman-Gollier puzzle," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 4(13), pages 1-21.

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