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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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File URL: http://www2.toulouse.inra.fr/lerna/travaux/cahiers2008/08.29.273.pdf
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Bibliographic Info

Paper provided by LERNA, University of Toulouse in its series LERNA Working Papers with number 08.29.273.

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Date of creation: Nov 2008
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Handle: RePEc:ler:wpaper:08.29.273

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References

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  1. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
  2. Gollier, Christian, 2008. "Discounting with Fat-Tailed Economic Growth," IDEI Working Papers 523, 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, vol. 3(25), pages 1-14.
  4. Ekaterini Panopoulou & Ben Groom & Phoebe Koundouri & Theologos Pantelidis, 2004. "An Econometric Approach To Estimating Long-Run Discount Rates," Royal Economic Society Annual Conference 2004 70, Royal Economic Society.
  5. Wolfgang Buchholz & Jan Schumacher, 2008. "Discounting the Long-Distant Future: A Simple Explanation for the Weitzman-Gollier-Puzzle," CESifo Working Paper Series 2357, CESifo Group Munich.
  6. Gollier, Christian, 2004. "The Consumption-Based Determinants of the Term Structure of Discount Rates," IDEI Working Papers 296, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
  8. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, vol. 1(2), pages 85-89, June.
  9. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
  10. Hepburn, Cameron & Groom, Ben, 2007. "Gamma discounting and expected net future value," Journal of Environmental Economics and Management, Elsevier, vol. 53(1), pages 99-109, January.
  11. GOLLIER Christian & KOUNDOURI Phoebe & PANTELIDIS Theologos, 2008. "Declining Discount Rates : Economic Justifications and Implications for Long-Run Policy," LERNA Working Papers 08.17.261, LERNA, University of Toulouse.
  12. Pizer, William & Newell, Richard, 2000. "Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?," Discussion Papers dp-00-45, Resources For the Future.
  13. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
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Citations

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Cited by:
  1. Gollier, Christian, 2009. "Should We Discount the Far-Distant Future at Its Lowest Possible Rate?," Economics Discussion Papers 2009-7, Kiel Institute for the World Economy.
  2. Cucchiella, Federica & D’Adamo, Idiano, 2012. "Feasibility study of developing photovoltaic power projects in Italy: An integrated approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(3), pages 1562-1576.
  3. 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, vol. 4(13), pages 1-21.
  4. Traeger, Christian P., 2012. "What's the rate? Disentangling the Weitzman and the Gollier effect," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt88x3d1vw, Department of Agricultural & Resource Economics, UC Berkeley.
  5. Nicole El Karoui & Mohamed Mrad & Caroline Hillairet, 2014. "Ramsey Rule with Progressive utility and Long Term Affine Yields Curves," Papers 1404.1913, arXiv.org.
  6. Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," TSE Working Papers 09-107, Toulouse School of Economics (TSE).
  7. Traeger, Christian P., 2013. "Discounting under uncertainty: Disentangling the Weitzman and the Gollier effect," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 573-582.
  8. Christophe Gouel & Sébastien Jean, 2012. "Optimal Food Price Stabilization in a Small Open Developing Country," Working Papers 2012-01, CEPII research center.
  9. Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2012. "Exponential Discounting Bias," Working Papers Series 2 12-05, ISCTE-IUL, Business Research Unit (BRU-IUL).
  10. 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 2009-42, Kiel Institute for the World Economy.
  11. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2014. "Ramsey Rule with Progressive Utility in Long Term Yield Curves Modeling," Working Papers hal-00974815, HAL.
  12. Nicole El Karoui & Mohamed Mrad & Caroline Hillairet, 2014. "Ramsey Rule with Progressive utility and Long Term Affine Yields Curves," Working Papers hal-00974831, HAL.
  13. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," CESifo Working Paper Series 2692, CESifo Group Munich.
  14. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2014. "Ramsey Rule with Progressive Utility in Long Term Yield Curves Modeling," Papers 1404.1895, arXiv.org.

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