Article ID Journal Published Year Pages File Type
7369733 Journal of Public Economics 2016 8 Pages PDF
Abstract
Using the gamma discounting argument of Weitzman (1998, 2001) when future interest rates are uncertain, several countries have decided to base their investment and sustainability policy evaluation on a decreasing term structure of discount rates. We show that this interpretation of the gamma discounting argument is in fact equivalent to the Local Expectations Hypothesis, a hypothesis globally rejected in empirical finance. We also show that gamma discounters are time-inconsistent and short-termist when shocks to economic growth are persistent. This is because they fail to account for the correlation between future consumption levels and spot interest rates.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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