Declining Discount Rates: Economic Justifications and Implications for Long-Run Policy
University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)
Athens University of Economics and Business - Department of International and European Economic Studies; University of Reading - Department of Economics
University of Macedonia - Department of Economics
Economic Policy, Vol. 23, Issue 56, pp. 757-795, October 2008
Should economic policy target immediate problems like malaria and AIDS? Or should it target climate change, which may have even more dramatic life-threatening effects in the very long term? We discuss how the pattern of discount rates over the planning horizon bears on this important issue. A declining pattern of discount rates is theoretically justified by uncertainty about future economic conditions, and its shape and relevance can be estimated from historical data. We analyse empirically long-term interest rate data from nine countries, construct a weighted average representing a possible global discount rate pattern for a very long range of future dates, and assess its implications for the valuation of carbon mitigation policies.
Number of Pages in PDF File: 38
Date posted: October 2, 2008