What is a generally accepted discount rate among economists?
EEK! asked:
Or perhaps a range of rates that seems reasonable. How do economists make this determination?
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Or perhaps a range of rates that seems reasonable. How do economists make this determination?
Bonus question: should I pay only the minimum on my student loans if my interest rate is less than the discount rate?
ETHEL
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- What is a generally accepted discount rate among economists?
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November 11th, 2008 at 7:49 pm
The discount rate is the expected return *you* require on your investment. This means that you have to compare the future benefits of studying (like the higher wage you will earn in the future minus the payback of the loan), to all the alternatives you have (like going to work for McDonald’s the rest of your life, or investing in presents to seduce and to marry a rich wife).
So… it’s not a fixed number. It’s the return rate you require on your investment.
That said: for an investment in stocks people take in general the risk free rate of the expected holding period (the corresponding T-bond plus some risk premium).