By Ivar Ekeland (Cahier de la Chaire n°27)
According to the Stern Report on climate change, the course of the next fifty years is set: present policies will impact only in the very long term, fifty to two hundred years from now. There is no market for interest rates, so far into the future, and economists must find other ways to set interest rates in a coherent way. This paper reviews some of the methods which have been used. We start with the classical Ramsey model of economic growth, which remains a central reference in the current debate, and we study the determinants of the interest rate in that framework. We then adapt the model (and the results) to take into account various concerns, namely (a) the existence of the environment as a distinct, non-producible good, (b) uncertainty on the parameters or on the model (c) intergenerational equity.
Keywords: Climate change, Long-term policy-making, Interest rates, Growth models.
