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Expected net present value, expected net future value, and the Ramsey rule

Abstract : Weitzman [1] 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 criteria 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 utility maximization. We show that if the aggregate consumption path is optimized and made flexible to news about future interest rates, the two criteria are equivalent. Moreover, they are also equivalent to the Ramsey rule extended to uncertainty.
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Submitted on : Sunday, May 31, 2020 - 7:42:47 AM
Last modification on : Thursday, June 10, 2021 - 3:45:51 AM

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Christian Gollier. Expected net present value, expected net future value, and the Ramsey rule. Journal of Environmental Economics and Management, Elsevier, 2010, 59 (2), pp.142-148. ⟨10.1016/j.jeem.2009.11.003⟩. ⟨hal-02665965⟩

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