TY - JOUR
AU - Weitzman,Martin L.
TI - The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process
JF - National Bureau of Economic Research Working Paper Series
VL - No. 18157
PY - 2012
Y2 - June 2012
DO - 10.3386/w18157
UR - http://www.nber.org/papers/w18157
L1 - http://www.nber.org/papers/w18157.pdf
N1 - Author contact info:
Martin L. Weitzman
Department of Economics
Harvard University
Littauer 313
Cambridge, MA 02138
Tel: 617/495-5133
Fax: 617/495-8570
E-Mail: mweitzman@harvard.edu
AB - 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.
ER -