The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process

Martin Weitzman

Environmental & Resource Economics, 2012, vol. 53, issue 3, 309-321

Abstract: The long term discount rate is critically dependent upon projections of future growth rates that are fuzzier in proportion to the remoteness of the time horizon. This paper models such increasing fuzziness as an evolving hidden-state stochastic process. The underlying trend growth rate is an unobservable random walk hidden by noisy transitory shocks and recoverable only as a probability distribution via Bayesian updating. A simple expression is derived for the time-declining Ramsey discount rate. The components of this hidden-state Ramsey discounting formula are then analyzed, followed by a few remarks about possible implications and applications. Copyright Springer Science+Business Media B.V. 2012

Keywords: Discounting; Climate change; Long term; Hidden state (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (17)

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Working Paper: The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process (2012)
Working Paper: The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process (2012)
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DOI: 10.1007/s10640-012-9594-y

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