The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process
NBER Working Paper No. 18157
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.
Published: Martin Weitzman, 2012. "The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 53(3), pages 309-321, November.
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