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http://ssrn.com/abstract=1400649
 
 

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Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule


Christian Gollier


University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

May 1, 2009

CESifo Working Paper Series No. 2643

Abstract:     
Weitzman (1998) 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 criterion 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 risk-neutral probabilities. We show that if the aggregate consumption path is optimized, the two criteria are equivalent. Moreover, they are also equivalent to the Ramsey rule extended to uncertainty.

Number of Pages in PDF File: 14

Keywords: discount rate, asset price, Ramsey rule, cost-benefit analysis

JEL Classification: D61

working papers series





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Date posted: May 7, 2009  

Suggested Citation

Gollier, Christian, Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule (May 1, 2009). CESifo Working Paper Series No. 2643. Available at SSRN: http://ssrn.com/abstract=1400649

Contact Information

Christian Gollier (Contact Author)
University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )
Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 61 12 86 30 (Phone)
+33 61 12 86 37 (Fax)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
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