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Value of the future: discounting in random environments

By J. Doyne Farmer, John Geanakoplos, 1951- Jaume Masoliver, Miquel Montero Torralbo and 1974- Josep Perelló


We analyze how to value future costs and benefits when they must be discounted relative to the present. We introduce the subject for the nonspecialist and take into account the randomness of the economic evolution by studying the discount function of three widely used processes for the dynamics of interest rates: Ornstein- Uhlenbeck, Feller, and log-normal. Besides obtaining exact expressions for the discount function and simple asymptotic approximations, we show that historical average interest rates overestimate long-run discount rates and that this effect can be large. In other words, long-run discount rates should be substantially less than the average rate observed in the past, otherwise any cost-benefit calculation would be biased in favor of the present and against interventions that may protect the future

Topics: Matèria condensada, Anàlisi cost-benefici, Interès, Condensed matter, Cost effectiveness, Interest
Publisher: American Physical Society
Year: 2016
DOI identifier: 10.1103/PhysRevE.91.052816
OAI identifier:

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