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Discounting the Long-Run

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Abstract

Expectations about the path of interest rates matter for many economic decisions. Three sources for obtaining information about such expectations are available. The first is extrapolation from historical data. The second consists of surveys of expectations. The third are expectations drawn from financial market prices, often referred to as market expectations. The last are usually considered to be model-based expectations, because, generally, a model is needed to reliably extract expectations from current prices. In this post, we explain the need for and usage of term structure models for extracting far in the future interest rate expectations from market rates, which can be used to discount the long run. We will illustrate our arguments by discussing the measurement of long-run discount rates for Social Security.

Suggested Citation

  • Tobias Adrian & Richard K. Crump & Peter A. Diamond & Rui Yu, 2015. "Discounting the Long-Run," Liberty Street Economics 20150831, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87059
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    More about this item

    Keywords

    discounting; social security; term premiums; term structure of interest rates;
    All these keywords.

    JEL classification:

    • H0 - Public Economics - - General
    • D1 - Microeconomics - - Household Behavior
    • G1 - Financial Economics - - General Financial Markets

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