Stationarity of Net Discount Rates: Review of the Literature and New Evidence
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Eric W. Christensen. 2019. Stationarity of Net Discount Rates: Review of the Literature and New Evidence. Journal of Legal Economics 25(1-2): pp. 29–51.
A broad literature has tested the stationarity of net discount rates (NDRs). Stationarity matters as it is required for use of historical NDRs. While most studies in this literature find evidence of stationarity, not all do. Consequently, this study seeks to explain why some studies support stationarity while others do not. The results show that stationarity depends on the time period used, the length of that period, whether the structural shift about 1980 related to the Federal Reserve’s approach to inflation and price stability was accounted for, and whether it is an inflation-based or wage-based NDR. Specifically, inflation-based NDRs are stationary over the long run (1953-2018), using only post-1980 data (1980-2018), and generally, if the historical period is about 30 years or more for NDRs based on medical care inflation. The results show that wage-based NDRs are only stationary using post-1980 (1980-2018) data and this stationarity is achieved only with a time trend.
Authors | Eric W. Christensen |
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Publication Year | 2019 |