The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process
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CitationWeitzman, Martin L. 2012. The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process. Environmental and Resource Economics 53(3): 309-321.
AbstractThe 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
Citable link to this pagehttp://nrs.harvard.edu/urn-3:HUL.InstRepos:11204670
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