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

By Christian Gollier. Social Science Research Network, 2010

127 citations recorded by the source corpus.

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 criteria 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 utility maximization. We show that if the aggregate consumption path is optimized and made flexible to news about future interest rates, the two criteria are equivalent. Moreover, they are also equivalent to the Ramsey rule extended to uncertainty.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/678277f5a1e93e3587c43474a0e983f3037f226c

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Citations in the corpus

The Long-Run Discount Rate Controversy (2014, background): “In a series of papers (Gollier 2009, 2010), Weitzman (2010), Gollier and Weitzman 2010), Gollier and Weitzman converged to the conclusion that both risk aversion and the optimization of the allocation of the net benefits through time must be introduced into the picture to solve the puzzle.”
How Should the Distant Future Be Discounted When Discount Rates are Uncertain? (2010, background): “In expectation, 2See Gollier (2004, 2009a, 2009b). this net future value is positive if ≥ δ exp ¡ RG(t) t ¢ , (5) where the time-dependent internal rate of return RG(t) satisfies the condition exp(RG(t) t) = X pi exp(ri t).”
Climate policy modeling: An online SCI-E and SSCI based literature review (2015, unknown): “5% 6% → Minimum 5% → Minimum Reference [72] [63] [6] [73] [71] [74] [75] Note: This figure is adapted from [19, 76].”