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

Author

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  • Phoebe Koundouri

    (Department of International and European Economic Studies, Athens University of Economics and Business, Greece)

  • Theologos Pantelidis

    (Department of Banking and Financial Management, University of Piraeus, Greece)

  • Ben Groom

    (Department of Economics, School of Oriental and African Studies, UK)

  • Ekaterini Panopoulou

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.

Suggested Citation

  • Phoebe Koundouri & Theologos Pantelidis & Ben Groom & Ekaterini Panopoulou, 2007. "Discounting the distant future: How much does model selection affect the certainty equivalent rate?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 641-656.
  • Handle: RePEc:jae:japmet:v:22:y:2007:i:3:p:641-656
    DOI: 10.1002/jae.937
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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