Discounting the Long-Run

Tobias Adrian, Richard Crump, Peter Diamond and Rui Yu

No 20150831, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Expectations about the path of interest rates matter for many economic decisions. Three sources for obtaining information about such expectations are available. The first is extrapolation from historical data. The second consists of surveys of expectations. The third are expectations drawn from financial market prices, often referred to as market expectations. The last are usually considered to be model-based expectations, because, generally, a model is needed to reliably extract expectations from current prices. In this post, we explain the need for and usage of term structure models for extracting far in the future interest rate expectations from market rates, which can be used to discount the long run. We will illustrate our arguments by discussing the measurement of long-run discount rates for Social Security.

Keywords: discounting; social security; term premiums; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: D1 G1 H0 (search for similar items in EconPapers)
Date: 2015-08-31
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