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Title: Value of the future: discounting in random environments
Author: Farmer, J. Doyne
Geanakoplos, John
Masoliver, Jaume, 1951-
Montero Torralbo, Miquel
Perelló, Josep, 1974-
Keywords: Matèria condensada
Anàlisi cost-benefici
Condensed matter
Cost effectiveness
Issue Date: 28-May-2015
Publisher: American Physical Society
Abstract: 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.
Note: Reproducció del document publicat a:
It is part of: Physical Review E, 2015, vol. 91, num. 5, p. 052816-1-052816-13
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ISSN: 1539-3755
Appears in Collections:Articles publicats en revistes (Física de la Matèria Condensada)

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