Estimating the rate of time preference for Iran: A recursive algorithm

Document Type : Research Paper


1 Associate Professor, Economics, Uiversity of Shiraz, Iran

2 PhD. Candidate, Economics , Uiversity of Shiraz, Iran


The rate of time preference plays an important role in discounting instantaneous utility in economic growth models and also in calculating social discount rate in cost-benefit analysis. In empirical researchers, this rate is assumed to be constant. However, the rate of time preference might vary over time. This paper develops a new algorithm to estimate this rate as a varied coefficient for the Iranian economy over the period 1965-2010. In our algorithm, we use a recursive method to estimate the initial values for the rate of time preference as a function of consumption. Given the effect of the rate of time preference on saving, and knowing their initial values, we use a filtering method to estimate these rates as a function of life expectancy. The average value of time preference rate over the period under consideration is 2.38 percent. This rate is found to be higher during the period of economic uncertainties such as Iran-Iraq imposed war. However, the rate is decreasing after the end of war.