Social Discount Rates Under Persistent Risks: A Theoretical and Numerical Analysis

Economic shocks can be felt for years or even decades. Social welfare functions that exhibit aversion to persistent consumption risk address several gaps in the social discounting literature. First, they allow analyzing the impact of risk aversion and dependences on discount rates. Second, they generate results with normative appeal: Persistent risk decreases the discount rates. Moreover, in the presence of persistent risk, the discount rates decrease with the social planner's risk aversion and her planning horizon. In addition, I provide an extended Ramsey equation for the persistent risk-averse social planner as well as a numerical application.