A Further Examination Regarding the Stability of the Net Discount Rate

The correct value for the net discount rate has been a topic of controversy among forensic economists. Based on available historical period, use of “total offset” method yields a net discount rate close to zero. Visual inspection of the data suggests the net discount rate exhibits a shift in 1979. Earlier studies have treated this shift in mean as exogenous and found evidence in favor of the break. Statistical procedures used by these studies are inappropriate since they don't account for pretest examination of data implicit in the specification of break-date. We use Perron's (1997) methodology to determine whether the net discount rate is characterized by a shift in the mean at an unknown break-date. Using quarterly data over the period 1964:01-1993:03, evidence consistent with a shift in the mean during the third quarter of 1978 was found and the average net discount rate from the post-1978:03 sample is 3.21%