discounting and divergence of opinion the objective of this paper is to adopt a general equilibrium model and determine the socially efficient discount factor risk free rate and discount rate when there are heterogeneous anticipations about the growth of the economy as well as heterogeneous time preference rates among others we tackle the following questions is the socially efficient discount factor an arithmetic average of the individual subjectively anticipated discount factors more generally can the arrow debreu prices the risk free rates the subjectively expected socially efficient discount factors and discount rates be obtained as an average of the individual subjectively anticipated ones can beliefs dispersion be analyzed as a sort of additional risk or uncertainty leading to possibly lower discount rates is it socially efficient when diversity of opinion is taken into account to reduce the discount rate per year for more distant horizons if so what is the trajectory of the decline

declining discount rates in this paper we ask whether the us government should replace its current discounting practices with a declining discount rate schedule as the united kingdom and france have done or continue to discount the future at a constant exponential rate to address the question we briefly present the theoretical basis for a declining discount rate ddr schedule and focus on how in practice a ddr could be estimated for use by policy analysts we discuss the empirical approaches in the literature and review how the united kingdom and france estimated their ddr schedules we conclude with advice on how the united states might proceed to consider modifying its current discounting practices i the expected net present value approach to ddrs

gamma discounting and expected net future value recent research suggests that the long term future should be discounted with a declining discount rate one such line of research exemplified by weitzman gamma discounting amer econ rev 91 2001 261 271 shows that the certainty equivalent discount rate is declining when future capital productivity is uncertain however in a recent paper gollier maximising the expected net future value as an alternative strategy to gamma discounting finan res lett 1 2004 85 89 puts forward a puzzle that casts doubt on the validity of this conclusion he asserts that using expected net future value rather than conventional expected net present value implies that the certainty equivalent discount rate increases over time this paper resolves the apparent puzzle by encompassing the models of gollier maximising the expected net future value as an alternative strategy to gamma discounting finan res lett 1 2004 85 89 and weitzman gamma discounting amer econ rev 91 2001 261 271 in fact gollier proves that as the evaluation date moves further into the future the discount rate at a given point in time will increase however given a particular evaluation date the schedule of discount rates is declining

macroeconomic forecasts and microeconomic forecasters in the presence of principal agent problems published macroeconomic forecasts by professional economists may not measure expectations forecasters may use their forecasts in order to manipulate beliefs about their ability i test a cross sectional implication of models of reputation and information revelation i find that as forecasters become older and more established they produce more radical forecasts since these more radical forecasts are in general less accurate ex post forecast accuracy grows significantly worse as forecasters become older and more established these findings are consistent with reputational factors at work in professional macroeconomic forecasts

longitude matters time zones and the location of foreign direct investment abstract using bilateral foreign direct investment fdi data we find that differences in time zones have a negative and significant effect on the location of fdi we show that this finding is robust across different specifications estimation methods and proxies for time zone differences time zones also have a negative effect on trade but this effect is smaller than that on fdi finally the impact of the time zone effect has increased over time suggesting that it is not likely to vanish with the introduction of new information technologies

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

does forced voting result in political polarization this paper estimates the effects of the compulsory voting legislation on individuals political orientations though a regression discontinuity framework the identification comes from brazil s dual voting system voluntary and compulsory whose exposure is determined based on citizen s date of birth using self collected data we find that compulsory voting legislation has sizable effects on individuals political preferences making them more likely to identify with a political party and to become extreme oriented

intra industry foreign direct investment we use a new firm level data set that establishes the location ownership and activity of 650 000 multinational subsidiaries close to a comprehensive picture of global multinational activity a number of patterns emerge from the data most foreign direct investment fdi occurs between rich countries the share of vertical fdi subsidiaries which provide inputs to their parent firms is larger than commonly thought even within developed countries more than half of all vertical subsidiaries are only observable at the four digit level because the inputs they are supplying are so proximate to their parent firms final good that they appear identical at the two digit level we call these proximate subsidiaries intra industry vertical fdi and find that their location and activity are significantly different to the inter industry vertical fdi visible at the two digit level these subsidiaries are not readily explained by the comparative advantage considerations in traditional models where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences we find that overwhelmingly multinationals tend to own the stages of production proximate to their final production giving rise to a class of high skill intra industry vertical fdi

a note on the local expectations hypothesis a discrete time exposition cox ingersoll and ross 1 distinguished various forms of the expectations hypothesis of the term structure of interest rates they proved that with one exception these are consistent with general equilibrium only in the trivial case in which interest rates are nonrandom the exception is the local expectations hypothesis because of this nonexistence result those who regard the expectations hypothesis as a natural starting point in investigating the term structure of interest rates are motivated to understand under what restrictions the local expectations hypothesis is valid in our experience many readers of cox ingersoll and ross s paper particularly those not conversant with stochastic calculus have difficulty following the discussion such readers may find it easier to work through an analysis of the local expectations hypothesis in a more familiar discrete time framework this paper provides such an exposition in continuous time the local expectations hypothesis states that the conditional expected rates of return on bonds of all maturities over the next instant are equal to each other and to the instantaneous spot interest rate cox ingersoll and ross proved p 783 ff that the local expectations hypothesis is valid in an exchange economy if the dynamics of consumption are locally certain in a stochastic constant returns to scale production economy they showed that the local expectations hypothesis will be valid under locally certain production dynamics if in addition agents have logarithmic utility the analogous definition of the local expectations hypothesis in discrete time is that the conditionally expected one period rates of return on bonds of all maturities are equal to each other and to the one period interest rate two examples below illustrate that the local expectations hypothesis is valid in discrete time economies under the same conditions as in continuous time economies these examples work because a sufficient condition for the validity of the local expectations hypothesis is that the marginal utility of consumption be locally certain this might happen either because consumption itself is locally certain as in both of the above mentioned examples or because the utility function exhibits risk neutrality and there is strictly positive consumption in every period a third example shows that risk neutrality alone does not imply the local expectations hypothesis if zero consumption can occur the reason is that the implication of risk neutrality that rates of interest are nonrandom requires the exclusion of corner solutions a restriction which is violated if zero consumption can occur

social incentives and voter turnout evidence from the swiss mail ballot system this paper uses a natural experiment to document the impact of social pressure on voting behavior the main hypothesis is that social pressure creates incentives to vote for the purpose of being seen at the voting act this incentive is particularly high in small and close knit communities empirically i analyze the effect of postal voting on voter participation in switzerland optional postal voting decreased the voting costs but simultaneously removed the social pressure to vote in spite of the large reduction in voting costs the effect on aggregate turnout was small however voter participation was more negatively affected in the smaller communities this lends support to the view that social incentives played a role for certain people s voting decisions jel h0 z13

detecting spot price forecasts in futures prices futures markets are often described as having two important social functions first they facilitate the transfer of commodity price risk and second they provide forecasts of commodity prices the evidence that futures markets transfer price risk is irrefutable however there is some debate about the markets forecasting ability in particular forecasts based on the current spot price are often as good as those based on the futures price some economists cite a failure to detect superior forecast power in futures prices as evidence of market inefficiency see e g leuthold 1974 and martin and garcia 1981 there are at least two other explanations first there may be nothing for the futures market to forecast if the current spot price equals the true expectation of the future spot price the futures market cannot provide a better forecast second a superior futures market forecast may be obscured by the unexpected component of the realized spot price the true expectation of the future spot price is unobservable one must approximate this expectation with the actual future spot price

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

inflation forecast errors and time variation in term premia the expectations theory of the term strueture is well known to give wrong signals as to the future course of long term interest rates one explanation involves rational time varying term premia however the anomaly may also be due to inflation forecast errors we study survey forecasts of inflation it seems that the respondents forecasts are insufficiently adaptive interest rates reflect expectations similar to the inflation forecasts as a result past survey forecast errors reliably predict premia on u s government bonds

macroeconomics and the term structure this paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance the topic is important to investors and also to policymakers who wish to extract macroeconomic expectations from longer term interest rates and take actions to influence those rates the simplest model of the term structure is the expectations hypothesis which posits that long term interest rates are expectations of future aver age short term rates in this paper we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis we review models that explain these anomalies using time varying risk premia although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing inflation uncertainty seems to play a large role finally while modern finance theory prices bonds and other assets in a single unified framework we also consider an earlier approach based on segmented markets market segmentation seems important to understand the term structure of interest rates during the recent financial crisis jel e31 e43 e52 e58

predictability in financial markets what do survey expectations tell us abstract there is widespread evidence of excess return predictability in financial markets for the foreign exchange market a number of studies have documented that the predictability of excess returns is closely related to the predictability of expectational errors of excess returns in this paper we investigate the link between the predictability of excess returns and expectational errors in a much broader set of financial markets using data on survey expectations of market participants in the stock market the foreign exchange market the bond market and money markets in various countries the results are striking first in markets where there is significant excess return predictability expectational errors of excess returns are predictable as well with the same sign and often even with similar magnitude this is the case for foreign exchange stock and bond markets second in the only market where excess returns are generally not predictable the money market expectational errors are not predictable either these findings suggest that an explanation for the predictability of excess returns must be closely linked to an explanation for the predictability of expectational errors

testing the expectations hypothesis using long maturity forward rates abstract this paper reports on long maturity interest rates the results hardly vary across maturities using forward rate regressions the expectations hypothesis eh is numerically close to being accepted for a long short data set the eh is statistically rejected accepted

a simple account of the behavior of long term interest rates recent empirical research on the term structure of interest rates has shown that the long term interest rate is well described by a distributed lag on short term interest rates but does not conform to the expectations theory of the term structure it has been suggested that the long rate overreacts to the short rate this paper presents aunified taxonomy of risk premia or deviations from the expectations theory this enables the hypothesis of overreaction to be formally stated it is shown that if anything the long rate has underreacted to the short rate however the independent movement of the long rate is primarily responsible for the failure of the expectations theory

risk adjusted gamma discounting abstract it is widely recognized that the economics of distant future events like climate change is critically dependent upon the choice of a discount rate unfortunately it is unclear how to discount distant future events when the future discount rate itself is unknown in previous work an analytically tractable approach called gamma discounting was proposed which gave a declining discount rate schedule as a simple closed form function of time this paper extends the previous gamma approach by using a ramsey optimal growth model combined with uncertainty about future productivity in order to risk adjust all probabilities by marginal utility weights some basic numerical examples are given which suggest that the overall effect of risk adjusted gamma discounting on lowering distant future discount rates may be significant the driving force is a fear factor from risk aversion to permanent productivity shocks representing catastrophic future states of the world

nominal interest rates as indicators of inflation expectations forward interest rates have become popular indicators of inflation expectations theusefulness of this indicator depends on the relative volatilty and the correlation of inflation expectations and expected real interest rates this paper studies u s and u k data using a range of different tools and data sets the forward rate rule perfoms reasonably well in spite of significant movements in the expected real interest rate the reason is that the noise that movements in the expected real interest rate add to the inflation expectations is balanced by a tendency for expected real interest rates and inflation expectations to move in opposite directions

discounting under uncertainty disentangling the weitzman and the gollier effect the uncertainty of future economic development affects the term structure of discount rates and thus the intertemporal weights that are to be used in cost benefit analysis the u k and france have recently adopted a falling term structure to incorporate uncertainty and the u s is considering a similar step a series of publications discusses the following concern a seemingly analogous argument used to justify falling discount rates can also justify increasing discount rates we show that increasing and decreasing discount rates mean different things can coexist are created by different channels through which risk affects evaluation and have the same qualitative effect of making long term payoffs more attractive

declining discount rates economic justifications and implications for long run policy should economic policy target immediate problems like malaria and aids or should it target climate change which may have even more dramatic life threatening effects in the very long term we discuss how the pattern of discount rates over the planning horizon bears on this important issue a declining pattern of discount rates is theoretically justified by uncertainty about future economic conditions and its shape and relevance can be estimated from historical data we analyse empirically long term interest rate data from nine countries construct a weighted average representing a possible global discount rate pattern for a very long range of future dates and assess its implications for the valuation of carbon mitigation policies christian gollier phoebe koundouri and theologos pantelidis

discounting and growth in a growing economy investing in safe projects raises intergenerational inequalities this deteriorates social welfare because of inequality aversion as expressed by decreasing marginal utility of consumption the social discount rate can be interpreted as the minimum rate of return that is necessary to compensate for the increased inequality generated by the investment for an intuitive precautionary argument this growth effect is reduced if growth is uncertain to complete the picture if the investment raises the collective risk this discount rate should also contain a risk premium recent developments weitzman 1998 2001 2013 gollier 2008 arrow et al 2013 converge toward recommending using a smaller discount rate for safe assets maturing later in this paper i show that this recommendation applied to the risk free rate relies on the assumption that shocks on the growth rate of consumption exhibit some degree of persistence i also show that this implies in parallel an increasing term structure for the risk premium globally the risk adjusted discount rate will have a decreasing term structure only if the asset s beta is small enough

aggregation of heterogeneous time preferences we examine an economy whose consumers have different discount factors for utility possibly not exponential we characterize the properties of efficient allocations of resources and of the shadow prices that would decentralize such allocations we show in particular that the representative agent has a decreasing discount rate when as is usually posited all of a group s members have a constant discount rate and decreasing absolute risk aversion preferences we also identify conditions that lead the representative agent to have a rate of impatience that decreases with gross domestic product per capita

nested tests of alternative term structure theories controversies in term structure theory center around the existence and variability of term premia in securities yields in this paper the term premium on a default free n period bond is defined as the difference between its observable yield to maturity and the average expected per annum rate of return on an n period strip of rollover investments in one period bonds to test alternative term structure theories without introducing ex post proxies for expectational variables this paper uses a set of cross section interest rate forecasts collected jointly with burton malkiel of princeton university from a population of large institutional lenders at four different phases of a single interest rate cycle statistical tests strongly confirm the existence of nonzero term premia at each survey date thereby rejecting the pure expectations theory of the term structure additional tests are unable to reject restrictions implied by the liquidity premium hypothesis that term premia should be positive and increase with maturity finally contrary to the martingale hypothesis ex ante term premium data vary significantly overtime and show a positive association with the level of interest rates this abstract was borrowed from another version of this item

a note on the determinants of unexpected exchange rate movements abstract in this paper we study the relative importance of surprises in fundamentals in explaining unexpected exchange rate movements employing a unique survey dataset that contains matched exchange rate and interest rate expectations we are able to derive a number of interesting conclusions a variance decomposition of unexpected exchange rate movements into various components reveals that interest rate news is relatively unimportant but that changes in perceptions about risk premia and more importantly revisions of expectations with regard to future exchange rate levels are crucial in explaining unexpected exchange rate movements

does real interest parity hold at longer maturities abstract this paper investigates the validity of real interest parity rip for long maturities across the us britain and germany a standard view commonly referred to as the fisher hypothesis is that over long horizons movements in expected inflation dominate movements in nominal interest rates or that real interest rates are equal over the 1973 1991 sample period however rejections of conditional rip occur at all horizons extending from a quarter to five years the evidence indicates that there appears to be no tendency for expected real interest rates to be equalized over longer maturities

the expectation hypothesis of the term structure of very short term rates statistical tests and economic value this paper re examines the validity of the expectation hypothesis eh of the term structure of us repo rates ranging in maturity from overnight to three months we extend the work of longstaff 2000a in two directions i we implement statistical tests designed to increase test power in this context ii more importantly we assess the economic value of departures from the eh based on criteria of profitability and economic significance in the context of a simple trading strategy the eh is rejected throughout the term structure examined on the basis of the statistical tests however the results of our economic analysis are favorable to the eh suggesting that the statistical rejections of the eh in the repo market are economically insignificant

federal reserve interest rate targeting rational expectations and the term structure abstract the amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved indeed spreads between certain long and short rates appear unrelated to future changes in the short rate contrary to the rational expectations hypothesis of the term structure this paper estimates a daily model of federal reserve interest rate targeting behavior which accompanied by the maintained hypothesis of rational expectations explains the varying predictive ability of the yield curve and elucidates the link between fed policy and the term structure

explaining voter turnout patterns an information theory voting research is rich in empirical regularities yet a parsimonious theory of voter turnout that can match the facts has proven to be elusive this paper argues that voter turnout patterns can be explained by extending the traditional rational voter model to include limited information a model is presented in which utility maximizing consumers receive higher payoffs from voting the more confident they are of their vote choice the model provides an explanation for the most important cross sectional voter turnout patterns in addition it suggests a novel explanation for the post 1960 decline in u s participation

global capital flows and financing constraints firms often cite financing constraints as one of their primary obstacles to investment global capital flows by bringing in scarce capital may ease the financing constraints of host country firms but if incoming foreign investors borrow heavily from domestic banks foreign direct investment may exacerbate financing constraints by crowding host country firms out of domestic capital markets combining a unique cross country firm level panel with time series data on restrictions on international transactions and capital flows harrison love and mcmillan find that different measures of global flows are associated with a reduction in firm level financing constraints first the authors show that one type of capital inflow foreign direct investment is associated with a reduction in financing constraints second they test whether restrictions on international transactions affects the financing constraints of firms the results suggest that only one type of restriction those on capital account transactions negatively affects firms financing constraints the authors also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of foreign direct investment this implies that foreign direct investment eases financing constraints for non multinational firms finally the authors show that 1 foreign direct investment only eases financing constraints in the non g7 countries and 2 other kinds of flows such as portfolio investment have no impact on financing constraints

the term structure spread and future changes in long and short rates in the g7 countries abstract according to the expectations hypothesis when the spread between long and short rates widens next quarter s long rate should rise in the united states however long rates decline instead of rising this anomaly is also present in canada the uk germany and japan four of the additional six g7 countries nevertheless in contrast to the us where long rates appear to overreact to expected future developments the anomalous short run movement of long rates in these other g7 countries is caused by an additive white noise error on long rates that does not materially affect the information in their term structure

the empirical failure of the expectations hypothesis of the term structure of bond yields this paper tests the expectations hypothesis eh using us monthly data for bond yields spanning the 1952 2003 sample period and ranging in maturity from 1 month to 10 years we apply the lagrange multiplier test developed by bekaert and hodrick 2001 and extend it to increase the test power a by introducing economic variables as conditioning information and b by using more than two bond yields in the model and testing the eh jointly on more than one pair of yields while the conventional bivariate procedure provides mixed results the more powerful testing procedures suggest rejection of the eh throughout the maturity spectrum examined

macroeconomic sources of risk in the term structure we develop a new way of modeling time variation in term premia based on the stochastic discount factor model of asset pricing the joint distribution of excess u s bond returns of different maturity and the observable fundamental macroeconomic factors is modeled using multivariate garch with conditional covariances in the mean to capture the term premia by testing the assumption of no arbitrage we derive a specification test of our model we estimate the contribution made to the term premia at different maturities through real and nominal sources of risk from the estimated term premia we recover the term structure of interest rates and examine how it varies through time finally we examine whether the reported failures of the rational expectations hypothesis can be attributed to an omitted time varying term premium

why the far distant future should be discounted at its lowest possible rate abstract a critical feature of the distant future is currently unresolvable uncertainty about what will then be the appropriate rate of return on capital to use for discounting this paper shows that there is a well defined sense in which the lowest possible interest rate should be used for discounting the far distant future part of any investment project some implications are discussed for evaluating long term environmental projects or activities like measures to mitigate the possible effects of global climate change

overreactions in the options market this paper examines the term structure of options implied volatilities using data on s p 100 index options because implied volatility is strongly mean reverting the implied volatility on a longer maturity option should move by less than one percent in response to a one percent move in the implied volatility of a shorter maturity option empirically this elasticity turns out to be larger than suggested by rational expectations theory long maturity options tend to overreact to changes in the implied volatility of short maturity options are investors rational do they behave like bayesian statisticians when it comes to incorporating new information into asset prices proponents of the efficient markets hypothesis would answer this question in the affirmative many others however believe that bayesian rationality is a poor description of investor behavior and that as a consequence asset prices tend to be informationally inefficient one way in which inefficiencies might arise is through the overreactions of traders to the arrival of new information 1 this possibility is raised by experimental and survey findings which indicate that people have a systematic tendency to overemphasize recent data at the expense of other information when making projections 2 the objective of this paper is to search for evidence of such overreactive behavior in a semingly peculiar place the options market options may appear to be unlikely candidates for overreaction because unlike primary securities their prices are closely tied down by arbitrage considerations as black and scholes 1973 demonstrate if stock price volatility is known options prices are completely determined any deviation from the prescribed value implies a riskless profit opportunity however given that volatility is in fact unknown and changing options do retain something of an independent nature not wholly redundant with their underlying stocks options can be thought of as reflecting a speculative market in volatility the implied volatility on a given option obtained by inverting a

policy positions information acquisition and turnout this paper explores the relationship between policy positions information acquisition and turnout in particular information acquisition and turnout choices are characterized as a function of citizens policy positions it is found that middle of the road citizens are the most likely to both acquire political information and abstain comparative statics analysis of the information technology indicates that an increase in the effectiveness of information has a higher positive impact on information and turnout than a comparable decrease in the cost of information furthermore following a polarization information and abstention are found to increase

a group rule utilitarian approach to voter turnout theory and evidence this paper explores a group rule utilitarian approach to understanding voter turnout inspired by the theoretical work of john c harsanyi 1980 and timothy j feddersen and alvaro sandroni 2002 it develops a model based on this approach and studies its performance in explaining turnout in texas liquor referenda the results are encouraging the comparative static predictions of the model are broadly consistent with the data and a structurally estimated version of the model yields reasonable coefficient estimates and fits the data well the structurally estimated model also outperforms a simple expressive voting model

the hardships of long distance relationships time zone proximity and the location of mnc s knowledge intensive activities abstract using a unique global dataset on multinational corporations mncs with precise location of headquarters and affiliates i present evidence of a trade off between distance to the headquarters and knowledge intensity of the affiliates economic activity this trade off is strongly diminished the higher the overlap in working hours between the headquarters and the affiliate in order to rule out biases arising from confounding factors i implement a regression discontinuity framework to show that the economic activity of a subsidiary located just across the time zone line which increases the overlap in working hours with its headquarters is on average roughly 1 higher on the knowledge intensity scale the results are present only for foreign horizontal subsidiaries overall the findings suggest that barriers to real time communication within mncs play an important role in the location decisions of their subsidiaries

multinationals multi plant economies and the gains from trade a general equilibrium model of a multinational enterprise based on economies of multi plant operation is developed these economies are modelled as arising from the existence of a joint input whose productivity in each production facility is independent of the number of facilities maintained by a firm the multinational thus offers the world increased technical efficiency by eliminating the duplication of the joint input that would occur with independent national firms since this technical efficiency may come at the expense of increased market power the full determinants of home country host country and world welfare are considered

intergenerational discounting with intragenerational inequality in consumption and the environment it is now established that the consumption discount rate is determined by the growth of consumption multiplied by the elasticity of marginal utility but distributive concerns are rarely reflected in the literature assuming a social welfare function with inequality aversion we consider a consumption discount rate that can be decomposed into the growth effect and the intragenerational distribution effect the framework is then extended to include population change and inequality in the environment as an amenity in a utility with constant elasticity of substitution numerical examples illustrate that distributional effects turn non negligibly negative that may reduce consumption discount rate by 1 3 for plausible parameters once distribution is adjusted for both population and the environment

discounting by committee abstract we study a dynamic social choice problem in which a sequence of committees must decide how to consume a public asset a committee convened at time t decides on consumption at t accounting for the behaviour of future committees committee members disagree about the appropriate value of the pure rate of time preference but must nevertheless reach a decision if each committee aggregates its members preferences in a utilitarian manner the collective preferences of successive committees will be time inconsistent and they will implement inefficient consumption plans if however committees decide on the level of consumption by a majoritarian vote in each period they may improve on the consumption plans implemented by utilitarian committees using a simple model we show that this occurs in empirically plausible cases application to the problem of choosing the social discount rate is discussed

the revival of the expectations hypothesis of the us term structure of interest rates abstract us interest rate data from 1987 to 1995 show a substantial predictive power of the spread for the short rate in line with the expectations hypothesis the estimation of a mccallum policy reaction model supports our conjecture that this striking result can be attributed to the adoption of the spread as an indicator for us monetary policy since the late eighties 1997 elsevier science s a

declining discount rates and the fisher effect inflated past discounted future uncertain and persistent real interest rates underpin one argument for using a declining term structure of social discount rates in the expected net present value enpv framework despite being controversial this approach has influenced both the inter agency working group on cost benefit analysis and the uk government s guidelines on discounting we first clarify the theoretical basis of the enpv approach then rather than following previous work which used a single series of u s treasury bond returns we treat nominal interest rates and inflation as co integrated series and estimate the empirical term structure of discount rates via the fisher effect this nests previous empirical models and is more flexible it also addresses an irregularity in previous work which used data on nominal interest rates until 1950 and real interest rates thereafter as we show the real and nominal data have very different time series properties this paper therefore provides a robustness check on previous discounting advice and updated methodological guidance at a time when governments around the world are reviewing their guidelines on social discounting the policy implications are discussed in the context of the social cost of carbon nuclear decommissioning and public health

discounting the distant future how much do uncertain rates increase valuations abstract we demonstrate that when the future path of the discount rate is uncertain and highly correlated the distant future should be discounted at significantly lower rates than suggested by the current rate we then use two centuries of us interest rate data to quantify this effect using both random walk and mean reverting models we compute the certainty equivalent rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future under the random walk model we find that the certainty equivalent rate falls continuously from 4 to 2 after 100 years 1 after 200 years and 0 5 after 300 years at horizons of 400 years the discounted value increases by a factor of over 40 000 relative to conventional discounting applied to climate change mitigation we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits

is mandatory voting better than voluntary voting we investigate the welfare effects of policies that increase voter turnout in costly voting models in a generalized costly voting model we show that if the electorate is sufficiently large then increasing voter turnout is generically efficient increasing turnout in small elections is only inefficient if the electorate is evenly divided or if there is already almost complete voter participation finally we argue that the effects underlying our results are robust in a large class of endogenous participation models

benchmarking the expectations hypothesis of the interest rate term structure an analysis of cointegration vectors i test cointegration restrictions that are consistent with the expectations hypothesis of the term structure by employing the full information maximum likelihood methods developed by johansen yield curves appear to be the result of cointegration among interest rates the cointegration vectors that best describe the long term impact of interest rate levels on interest rate changes can often be written as linear combinations of interest rate spreads there is however difficulty in keeping short term yields in such a restricted cointegrated system with other interest rates short term speculative returns from long term bonds do not conform to the expectations hypothesis

new hope for the expectations hypothesis of the term structure of interest rates survey data on interest rate expectations permit separate testing of the two alternative hypotheses in traditional term structure tests that the expectations hypothesis fails and that expected future interest rates are ex post inefficient forecasts we find that the source of the spread s poor predictions of future interest rates varies with maturity at short maturities the expectations hypothesis fails at long maturities however changes in the yield curve reflect changes in expected future rates one for one an implication of the expectations hypothesis this result confirms earlier findings that long rates underreact to short rates but now it cannot be attributed to term premia if the attractiveness of an economic hypothesis is measured by the number of papers which statistically reject it the expectations theory of the term structure is a knockout most tests beginning with macaulay 1938 find no evidence supporting the expectations hypothesis 1 many cannot even reject statistically the alternative hypothesis that the spread between long and short rates contains no information about future interest rate changes 2 to make matters worse in u s postwar data future long rates tend to rise when short rates are above long rates since the expectations hypothesis would predict that long rates tend to fall the theory often does worse than even the naive model that future interest

estimating the electoral effects of voter turnout there are two undercurrents to much of the literature on voter turnout a normative belief that high rates of voter participation are desirable and an empirical expectation that variation in voter turnout will have electoral consequences to some extent these undercurrents flow together although one might argue that high turnout is preferable for purely expressive reasons the typical normative claim asserts that increased levels of voter participation improve the quality of representation by reducing any bias that might result from dissimilarities between voters and nonvoters assumed differences between those who vote and those who do not are also at the heart of the commonly hypothesized empirical relationship between aggregate turnout and partisan vote share as argued originally by the authors of the american voter campbell et al 1960 96 115 if nonvoters and occasional voters hold preferences that differ from those of habitual or core voters then variation in turnout is likely to have meaningful electoral implications higher turnout might advantage one party over another might advantage incumbents or perhaps

time variation in term premia international survey based evidence using a large previously unexplored data set of survey based interest rate forecasts that covers a broad range of countries this paper re examines the expectations hypothesis of the term structure of interest rates we find that survey based interest rate forecasts outperform not only a random walk forecast but also outperform forecasts from forward rates when using these superior survey based forecasts in a modified expectations hypothesis test the expectations hypothesis is rejected for fewer countries at lower significance levels and has greater explanatory power than when using a traditional forward rates based test we furthermore document strong time variation in the term premia which is an important reason why the traditional expectations hypothesis test is rejected so frequently this time variation seems to arise from the changing attitudes towards risk among market participants and as a compensation for the change in liquidity in the term structure finally we find that generalizing findings from earlier u s studies to other countries may lead to bias in the true economic relationships in these countries

how should the distant future be discounted when discount rates are uncertain abstract the so called weitzman gollier puzzle is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results the puzzle is resolved when agents optimize their consumption plans the long run discount rate declines over time toward its lowest possible value

determining the generalized discount rate for risky projects it is widely recognized that the evaluation of risky projects critically depends on how the riskiness of future benefits is treated standard discounting theories are based on the assumption that risks that are uncorrelated with aggregate risk are diversified so that projects idiosyncratic risk is not priced however this may not be true for long term risky projects such as those with persistent idiosyncratic shocks in this study we investigate the impact of both aggregate risk and nondiversifiable idiosyncratic risk on the discount rate for risky projects we extend the generalized discount rate to the case of persistent shocks a particular advantage of the generalized discount rate is that it can be applied in the setting of incomplete markets we show that nondiversifiable idiosyncratic risk reduces the discount rate and increases the present value of projects future uncertain benefits we further apply our findings to the evaluation of emissions reduction projects

the term structure of very short term rates new evidence for the expectations hypothesis abstract empirical researchers have frequently rejected the expectations hypothesis the expectations hypothesis however has seldom if ever been tested at the extreme short end of the term structure where maturities are measured in days or weeks using overnight weekly and monthly repo rates i find that term rates are almost unbiased estimates of the average overnight rate this evidence provides new support for the expectations hypothesis

gamma discounters are short termist weitzman 1998 2001 proposed a simple gamma discounting method to characterize the term structure of discount rates today from the sole distribution of future spot interest rates this rule which justifies using a smaller discount rate for longer maturities is now used for long term policy evaluations in the uk france norway and potentially in the us but we show that there is no social preference within the discounted expected utility framework that generically supports this pricing model and its underlying criterion the expected net present value rule considering a standard lucas tree economy we characterize the term structure from a coherent joint distribution of future spot interest rates and future consumption levels when future growth rates are positively serially correlated efficient discount rates today are decreasing with maturity and the gamma discounting rule yields discount rates that are larger than the efficient ones

positively gamma discounting combining the opinions of experts on the social discount rate the aggregated term structure of social discount rates that results from weitzman s 2001 survey of expert opinion is shown to be highly sensitive to the nature of the responses if variation reflects irreducible differences in ethical judgments the term structure can decline rapidly if variation occurred because respondents were forecasting future rates under uncertainty the term structure is much flatter because additional experts provide new information the former approach triples the social cost of carbon when compared to the latter the distinction between heterogeneity and uncertainty illustrates the need for a nuanced treatment of survey data in intergenerational policy making

unequal participation democracy s unresolved dilemma presidential address american political science association 1996 low voter turnout is a serious democratic problem for five reasons 1 it means unequal turnout that is systematically biased against less well to do citizens 2 unequal turnout spells unequal political influence 3 u s voter turnout is especially low but measured as percent of voting age population it is also relatively low in most other countries 4 turnout in midterm regional local and supranational elections less salient but by no means unimportant elections tends to be especially poor 5 turnout appears to be declining everywhere the problem of inequality can be solved by institutional mechanisms that maximize turnout one option is the combination of voter friendly registration rules proportional representation infrequent elections weekend voting and holding less salient elections concurrently with the most important national elections the other option which can maximize turnout by itself is compulsory voting its advantages far outweigh the normative and practical objections to it

time varying term premia and traditional hypotheses about the term structure empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the expectations hypothesis this paper shows that the expectations hypothesis can actually imply time varying term premia if the time frame for which the expectations hypothesis holds differs from the return measurement period furthermore many of the properties of these term premia are consistent with those of observed term premia these results are important because they imply that the case against the expectations hypothesis is weaker than claimed in the empirical literature many recent studies have presented empirical evidence that term premia in bond returns are time varying for example fama and bliss 1987 document that term premia in treasury bond returns vary reliably through time and can be forecast using the information in forward rates similar evidence of variation through time in term premia is given by shiller 1979 startz 1982 shiller campbell and schoenholtz 1983 fama 1984 mankiw 1986 shiller 1986 campbell 1987 engel lilien and robins 1987 shiller and mcculloch 1987 froot 1989 simon 1989 and others these empirical results have been interpreted in the literature as strong evidence against the expectations hypothesis eh 1 the reason for this interpretation is the widely held view that the eh is consistent only with term premia that are constant through time 2 in this paper we show that the eh need not imply constant term premia specifically we present an example in which an important form of the eh implies nonzero term premia that vary randomly through their dependence on the volatility of the term structure we show that the variation in these term premia can be significant relative to the variation in expected returns for longer maturity bonds furthermore we show that these term premia are directly related to the forward spot rate differential the key insight of this example is that the empirical implications of the eh depend critically on the length of the period over which the eh is assumed to hold if this interval is shorter than the period over which bond returns are measured aggregation over time can induce rich patterns of variation in observable term premia

new techniques to extract market expectations from financial instruments this paper is a selective survey of new or recent methods to extract information about market expectations from asset prices for monetary policy purposes traditionally interest rates and forward exchange rates have been used to extract expected means of future interest rates exchange rates and inflation more recently these methods have been refined to rely on implied forward interest rates so as to extract expected future time paths very recently methods have been designed to extract not only the means but the whole risk neutral probability distribution from a set of option prices

learning and the yield curve two central implications of expectations hypothesis under rational expectations are inconsistent with yield curve data i future expected long yields fall instead of rising when yield spread rises ii long yields are excessively volatile relative to short yields i propose an optimization framework in which boundedly rational agents use adaptive learning to form expectations the belief structure rationalizes pattern of yields observed in the data so that the first puzzle does not arise with subjective expectations intertemporal income and substitution effects are amplified relative to rational expectations the second puzzle is partly accounted for by extra volatility due to parameter uncertainty

discounting the distant future how much does model selection affect the certainty equivalent rate evaluating investment with long term consequences using discount rates that decline with the time horizon declining discount rates of ddrs means that future welfare changes are of greater consequence in present value terms recent work in this area has turned towards operationalising the theory and establishing a schedule of ddrs for use in cost benefit analysis using us data we make the following points concerning this transition i model selectionhas important implications for operationalising a theory of ddrs that depends upon uncertainty ii misspecification testing naturally leads to employing models that account for changes in the interest reat generating medanism lastly we provide an analysis of the policy implications of ddrs in the context of climate change for the us and show that the use of a state space model can increase valuations by 150 compared to conventional constant discounting

the term structure of interest rates and regime shifts some empirical results abstract a test of the expectations theory of the term structure in the framework of a regime switching var model for a change in the short rate and the short long spread with euro us and euro swiss franc rate data points to the importance of uncertainty about the procedures of monetary policy for the rejection of the expectations theory in the us case whereas in the swiss case a time varying term premium also seems to be relevant

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies