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Discussion Paper

Discounting the Distant Future

If the historical average annual real interest rate is m > 0, and if the world is stationary, should consumption in the distant future be discounted at the rate of m per year? Suppose the annual real interest rate r(t) reverts to m according to the Ornstein Uhlenbeck (OU) continuous time process dr(t) = α[m – r(t)]dt + kdw(t), where w is a standard Wiener process.