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Environmental and Resource Economics

, Volume 53, Issue 3, pp 309–321 | Cite as

The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process

  • Martin L. Weitzman
Article

Abstract

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.

Keywords

Discounting Climate change Long term Hidden state 

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References

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Copyright information

© Springer Science+Business Media B.V. 2012

Authors and Affiliations

  1. 1.Department of EconomicsHarvard UniversityCambridgeUSA

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