Time Horizon and the Discount Rate |
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Authors: | Christian Gollier |
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Institution: | University of Toulouse, Toulouse, France, 22Address correspondence to IDEI, Université des Sciences Sociales, Manufacture des Tabacs, 21 allée de Brienne, 31000 Toulouse, France.f1gollier@cict.frf1 |
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Abstract: | We consider an economy à la Lucas (1978, Econometrica46 , 1429-1446) with a risk-averse representative agent. The exogenous growth rate of the economy follows a random walk. We characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate. The benchmark result is that, when the growth rate is almost surely nonnegative, the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth. Relaxing the assumption on the absence of recession requires more restrictions on preferences, such as increasing relative prudence. Journal of Economic Literature Classification Numbers: D81, D91, Q25, Q28. |
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Keywords: | discounting uncertain growth prudence time horizon |
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