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Social discounting under uncertainty: A cross-country comparison

  • Hepburn, Cameron
  • Koundouri, Phoebe
  • Panopoulou, Ekaterini
  • Pantelidis, Theologos

Recent research suggests that social cost-benefit analysis should be conducted with a declining discount rate. For instance Newell and Pizer [Discounting the distant future: how much do uncertain rates increase valuations? J. Environ. Econ. Manage. 46 (2003) 52-71] show that the US certainty-equivalent discount rate declines through time, using a simple autoregressive model of US interest rates. This paper extends that line of research, estimating both autoregressive and regime-switching models of real interest rates to determine certainty-equivalent discount rates in Australia, Canada, Germany and the UK. It is found that the regime-switching model is a better model of past interest rate behavior for all four countries. This model tends to produce a more rapid decline in certainty-equivalent discount rates. The paper provides applications to the economics of climate change and nuclear power.

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

Volume (Year): 57 (2009)
Issue (Month): 2 (March)
Pages: 140-150

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Handle: RePEc:eee:jeeman:v:57:y:2009:i:2:p:140-150
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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