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

14 Pages Posted: 7 May 2009

See all articles by Christian Gollier

Christian Gollier

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

Date Written: May 1, 2009

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.

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

JEL Classification: D61

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: https://ssrn.com/abstract=1400649

Christian Gollier (Contact Author)

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
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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) ( email )

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Munich, DE-81679
Germany

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