Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/75948
Authors: 
Alvarez, Luis H. R.
Koskela, Erkki
Year of Publication: 
2001
Series/Report no.: 
CESifo Working Paper 606
Abstract: 
The current literature on optimal forest rotation makes the assumption of constant interest rate. However, the irreversible harvesting decisions of forest stands are typically subject to relatively long time horizons over which interest rates do fluctuate considerably. In this paper we apply the Wicksellian single rotation framework to extend the existing studies to cover the unexplored case of variable interest rate. Given the technical generality of the considered valuation problem, we provide a thorough mathematical characterization of the optimal timing problem and develop new results. We show that even in the deterministic case if the current interest rate deviates from its long-run steady state, interest rate variability changes the rotation age significantly when compared with the constant discounting case. Further, and importantly, allowing for interest rate uncertainty is shown to increase the optimal rotation period when the value of the optimal policy is a convex function of the current interest rate. In line with this finding, we also establish that increased interest rate volatility has a positive impact on the optimal rotation period.
Subjects: 
Wicksellian rotation
variable interest rates
linear diffusions
optimal stopping
free boundary problems
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.