The net discount rate

CONCLUSION

 

The net discount rate, measured as the average difference between the nominal wage growth and the nominal interest rate over the available historical period, is often used by forensic economists to determine the present value of future earnings losses. The correct value to use for the net discount rate has, in recent years, been a topic of controversy and extensive discussion among practitioners.

In this paper, a review on the analysis of the net discount rate approximated by the difference in the interest rate on the banks in the United Kingdom vis a vis the Bank of England. The econometric tests was designed to have power against the stationary alternative that allows for a single shift in the mean. Unlike previous studies, this testing procedure does not require pre-specification of the break-date. Rather, the break-date is determined endogenously. In the eventuality that the test statistics are significant, the break-date may be estimated as the time point in the sample that maximizes the evidence against the unit root null hypothesis.

While the methods outlined are designed to have power against the single break alternative, one may not be able to preclude the presence of more than one break under the alternative hypothesis. In this case, the practitioner may use the average net discount rate based on a smaller sample such as the most recent average net discount rate.

 

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