Declining Discount Rates: Evidence from the UK

Table 1: Estimation Results

Panel A: AR(4) model
Coefficient	Estimate	Std. Error	t-stat.
n	1.201	0.177	6.777
a1	1.054	0.058	18.165
a2	-0.125	0.089	-1.392
a3	-0.443	0.070	6.308
a4	0.368	0.035	10.452
^σ2!	0.064	0.005	13.733

Panel B: Regime Switching model

Coefficient	Estimate	Std. Error	t-stat.
ni	0.760	0.244	3.117
_a1₁	0.700	0.312	2.249
_a1₂	-0.212	0.312	-0.679
n2	1.306	0.082	15.892
a²₁	1.397	0.079	20.573
a²₂	-0.530	0.058	-9.094
σ2₁	0.219	0.047	4.694
_σ2₂	0.014	0.002	8.106
P	0.767	0.101	7.543
Q	0.933	0.033	28.617

Panel C: State Space model

Coefficient	Estimate	Std. Error	t-stat.
n	0.266	0.044	6.091
n1	0.991	0.002	438.82
ln(σ_e² )	-2.503	0.104	-24.049
^ln(^σ2u)	-6.462	0.594	-10.884

Table 2. Certainty Equivalent Discount Factors

Model Year	3.5% Constant	AR(4)	Regime Switching	State Space
Л	0.96618	0.96618	0.96618	0.96618
20	0.50257	0.48208	0.51472	0.61857
40	0.25257	0.23676	0.26746	0.40678
60	0.12693	0.11778	0.13981	0.27722
80	0.06379	0.05912	0.07354	0.19368
100	0.03206	0.02997	0.0389	0.13775
150	0.00574	0.00569	0.00813	0.06172
200	0.00103	0.00115	0.00177	0.02882
250	0.00018	0.00027	0.00041	0.01379
300	0.00003	0.00008	0.0001	0.00669
350	0.00001	0.00003	0.00003	0.00328
400	0.00000	0.00002	0.00001	0.00161

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