Social Discounting under Uncertainty: A Cross-Country Comparison
Cameron J. Hepburn
London School of Economics, Grantham Research Institute
Athens University of Economics and Business - Department of International and European Economic Studies; University of Reading - Department of Economics
University of Piraeus - Department of Statistics and Insurance Science
University of Macedonia - Department of Economics
IIIS Discussion Paper No. 177
Recent research suggests that social cost-benefit analysis should be con ducted with a declining discount rate. For instance, Newell and Pizer  show that the U.S. certainty-equivalent discount rate declines through time, using a simple autoregressive model of U.S. 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 United Kingdom. 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.
Number of Pages in PDF File: 33
Keywords: discounting, uncertainty, regime-switching models, climate change policy, nuclear power
JEL Classification: Q48, C13, C53, E43.working papers series
Date posted: November 19, 2006
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