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Declining discount rates and the Fisher Effect: inflated past, discounted future?

Mark C. Freeman, Ben Groom (), Ekaterini Panopoulou () and Theologos Pantelidis

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Uncertain and persistent real interest rates underpin one argument for using a declining term structure of social discount rates in the Expected Net Present Value (ENPV) framework. Despite being controversial, this approach has influenced both the Inter-Agency Working Group on Cost–Benefit Analysis and the UK government׳s guidelines on discounting. We first clarify the theoretical basis of the ENPV approach. Then, rather than following previous work which used a single series of U.S. Treasury bond returns, we treat nominal interest rates and inflation as co-integrated series and estimate the empirical term structure of discount rates via the ‘Fisher Effect’. This nests previous empirical models and is more flexible. It also addresses an irregularity in previous work which used data on nominal interest rates until 1950, and real interest rates thereafter. As we show, the real and nominal data have very different time series properties. This paper therefore provides a robustness check on previous discounting advice and updated methodological guidance at a time when governments around the world are reviewing their guidelines on social discounting. The policy implications are discussed in the context of the Social Cost of Carbon, nuclear decommissioning and public health.

Keywords: Social discounting; declining discount rates; fisher Effect; real and nominal interest rates; social cost of carbon. (search for similar items in EconPapers)
JEL-codes: C13 C53 E43 Q48 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ene and nep-mac
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Published in Journal of Environmental Economics and Management, 2015, 73, pp. 32-49. ISSN: 0095-0696

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http://eprints.lse.ac.uk/64143/ Open access version. (application/pdf)

Related works:
Journal Article: Declining discount rates and the Fisher Effect: Inflated past, discounted future? (2015) Downloads
Working Paper: Declining discount rates and the ‘Fisher Effect’: Inflated past, discounted future? (2015) Downloads
Working Paper: Declining discount rates and the Fisher Effect: Inflated past, discounted future? (2013) Downloads
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