Wicksellian theory of forest rotation under interest rate variability [An article from: Journal of Economic Dynamics and Control]

This digital document is a journal article from Journal of Economic Dynamics and Control, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
We apply the Wicksellian single rotation framework to cover the unexplored case of variable and stochastic interest rate. We provide a mathematical characterization of the two-dimensional optimal stopping problem and show in the presence of amenity valuation that increased interest-rate volatility lengthens the optimal rotation period and increases the value of the optimal policy. By modelling the interest rate as a mean reverting process and forest value as a geometric Brownian motion and abstracting from amenity valuation, we present an explicit solution for the problem. Numerical illustrations indicate that interest-rate volatility has a significant and non-linear impact on optimal rotation.