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Title:Expected net present value, expected net future value, and the Ramsey rule PDF Logo
Authors:Gollier, Christian
Issue Date:2009
Series/Report no.:CESifo working paper 2643
Abstract:Weitzman (1998) showed that when future interest rates are uncertain, using the expected net present value implies a term structure of discount rates that is decreasing to the smallest possible interest rate. On the contrary, using the expected net future value criterion implies an increasing term structure of discount rates up to the largest possible interest rate. We reconcile the two approaches by introducing risk aversion and risk-neutral probabilities. We show that if the aggregate consumption path is optimized, the two criteria are equivalent. Moreover, they are also equivalent to the Ramsey rule extended to uncertainty.
Subjects:discount rate
asset price
Ramsey rule
cost-benefit analysis
JEL:D61
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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