 Wicksellian Theory of Forest Rotation under Interest Rate VariabilityLuis Alvarez and Erkki Koskela No 606, CESifo Working Paper Series from CESifo 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. Keywords: Wicksellian rotation; variable interest rates; linear diffusions; optimal stopping; free boundary problems (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_606 Access Statistics for this paper More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC. |
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