Structural Instability in the Net Discount Rate Series Based on High Grade Municipal Bond Yields

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Journal of Legal Economics



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Introduction Forensic economists often use the net discount rate to calculate the present value of future earning's losses. Typically, the net discount rate is estimated as the average difference between the nominal interest rate and the nominal rate of wage growth over some reasonable period of time. There are two important considerations that need to be addressed in order to obtain a value for the net discount rate. First, one must find the appropriate interest rate for calculating the net discount rate. Second, the practitioner must choose the reasonable period of time over which to average the net discount rate. With respect to the first issue, virtually all of the published studies on net discount rates to date have utilized returns on U.S. Treasury securities on the interest generating side of the equation. The only controversy has been whether to use short-term treasuries as advocated by Frank and Male (1994; 1996) and Palaez (1995) or the longer term notes as examined by Gelles and Johnson (1996) and Johnson and Gelles (1996). Ignored in these discussions is the application issue raised by the Federal court's requirement that the impact of taxes be considered when calculating income losses in personal injury and wrongful death cases. To address this court dictum, forensic practitioners have turned to municipal bonds as a means of responding to the tax question on the earnings side of the award. What has been missing in the literature is a reviewed study of the net discount rate ...

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