Social discounting under uncertainty: a cross country comparison
with Koundouri, Panopoulou, and Pantelidis, Journal of Environmental Economics and Management, 57:2, 140-150, 2009.
Keywords: Climate Change / Discounting / Nuclear power / Regime-switching models / uncertainty
Recent research suggests that social cost-benefit analysis should be conducted with a declining discount rate. For instance Newell and Pizer [Discounting the distant future: how much do uncertain rates increase valuations? J. Environ. Econ. Manage. 46 (2003) 52–71] show that the US certainty-equivalent discount rate declines through time, using a simple autoregressive model of US 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 UK. 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.