Young Economics.

Stimulus as a change in the discount factor

with 2 comments

Quick thought: Simple government cost-benefit analysis often involves discounting future benefits using a discount rate and seeing if they outweigh the current costs. The problem is that one’s recommendation often depends on value of the discount rate. Certain projects, such as climate amelioration and US metrification, would only be undertaken with a discount rates close to 1 (equating future outcomes with present ones). I could imagine an economically-minded government that, in normal times, uses a particular discount rate, but that during times of recession (when stimulus is needed) uses a different rate closer to 1 so as to initiate more, but still arguably worthwhile,  projects.

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Written by Brian Quistorff

August 15, 2009 at 10:39 am

Posted in Uncategorized

2 Responses

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  1. Nice thought Brian. This sort of fits in with the whole notion of using crises to push through change and new policy.

    Question though: what’s US metrification?

    jk

    August 16, 2009 at 12:06 pm

  2. Metrification is switching from imperial units (feet, Farenheit, lbs, etc.) to metric units (meters, Celsius, grams, etc.). Most policy makers think it’s a good goal, but the upfront cost is just so much compared the long-term gains.

    bequw

    August 16, 2009 at 8:15 pm


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