Social Discounting Under Uncertainty: A Cross-Country Comparison

Abstract

Recent research suggests that social cost-bene―t analysis should be conducted with a declining discount rate. For instance, Newell and Pizer [23] 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.

Keywords: Discounting, Uncertainty, Regime-Switching Models, Climate Change, Nuclear Power

JEL Classification: Q48, C13, C53, E43