Reassessing the government's discount rate policy in light of new theory and data in a world economy with a high degree of capital mobility

Abstract

The paper reexamines the government's discount rate policy in the context of new evidence on international capital mobility, the relationship between deficits and interest rates, the relationship between consumer interest rates and the consumer's rate of time preference, and intergenerational compensation. It concludes that the approximate discount rate for government decisions will differ depending on the policy problem and that the government's borrowing rate is appropriate in some cases and in others the private rate should be used. For long term policies, the benefit-cost rationale for discounting breaks down and must be reestablished on principles incorporating intergenerational equity.