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On Forest Rotation under Interest Rate Variability

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Author Info
Luis Alvarez ()
Erkki Koskela ()
Abstract

The current literature on optimal forest rotation makes the unrealistic assumption of a constant interest rate although harvesting decisions of forest stands are typically subject to relatively long time horizons. We apply the single rotation framework to extend the existing studies to cover the unexplored case of variable interest rate. We show that even in the deterministic case if the current interest rate deviates from its long-run steady state, interest rate variability may change the rotation age significantly when compared with the constant discounting case. Further, and importantly, allowing for interest rate uncertainty as a mean reverting process and forest value as a geometric Brownian motion, we can provide an explicit solution for the two dimensional path-dependent optimal stopping problem. Increased interest rate volatility is shown to lengthen the optimal rotation period. Numerical calculations show that interest rate volatility has a large quantitative importance. Copyright Kluwer Academic Publishers 2003

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File URL: http://hdl.handle.net/10.1023/A:1024695701513
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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 10 (2003)
Issue (Month): 4 (August)
Pages: 489-503
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:kap:apfinm:v:10:y:2003:i:4:p:489-503

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Web page: http://springerlink.metapress.com/link.asp?id=102851

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Related research
Keywords: optimal rotation; variable interest rates; optimal stopping; free boundary problems;

References listed on IDEAS
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  1. Reed, William J., 1984. "The effects of the risk of fire on the optimal rotation of a forest," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 180-190, June. [Downloadable!] (restricted)
  2. Willassen, Yngve, 1998. "The stochastic rotation problem: A generalization of Faustmann's formula to stochastic forest growth," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 573-596, April. [Downloadable!] (restricted)
  3. Alvarez, Luis H. R. & Koskela, Erkki, 2001. "Wicksellian Theory of Forest Rotation under Interest Rate Variability," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Insley, Margaret, 2002. "A Real Options Approach to the Valuation of a Forestry Investment," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 471-492, November. [Downloadable!] (restricted)
  5. Markku Ollikainen & Erkki Koskela, 2001. "Optimal Private and Public Harvesting under Spatial and Temporal Interdependence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Reed, William J & Clarke, Harry R, 1990. "Harvest Decisions and Asset Valuation for Biological Resources Exhibiting Size-Dependent Stochastic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 147-69, February. [Downloadable!] (restricted)
  7. Tahvonen, Olli & Salo, Seppo & Kuuluvainen, Jari, 2001. "Optimal forest rotation and land values under a borrowing constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1595-1627, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sylvain Caurla & Philippe Delacotte & Franck Lecocq & Ahmed Barkaoui, 2009. "Fuelwood consumption, restrictions about resource availability and public policies: impacts on the French forest sector," Working Papers - Cahiers du LEF 2009-03, Laboratoire d'Economie Forestiere, AgroParisTech-INRA. [Downloadable!]
  2. Erkki Koskela & Matti Viren, 2003. "Government Size and Output Volatility: New International Evidence," Discussion Papers 857, The Research Institute of the Finnish Economy. [Downloadable!]
  3. Ville Kaitila, 2003. "Convergence of Real GDP per Capita in the EU15 area: How do the Accession Countries Fit in ?," Discussion Papers 865, The Research Institute of the Finnish Economy. [Downloadable!]
  4. Antti-Jussi Tahvanainen, 2003. "The Capital Structure of Finnish Biotechnology SMEs - An empirical analysisi," Discussion Papers 864, The Research Institute of the Finnish Economy. [Downloadable!]
  5. Olivier Damette & Philippe Delacotte, 2009. "The environmental resource curse hypothesis: the forest case," Working Papers - Cahiers du LEF 2009-04, Laboratoire d'Economie Forestiere, AgroParisTech-INRA. [Downloadable!]
  6. Tomi Hussi, 2003. "Reconfiguring Knowledge Management. Combining Intellectual Capital, Intangible Assets and Knowledge Creation," Discussion Papers 849, The Research Institute of the Finnish Economy. [Downloadable!]
  7. Marielle Brunette & Stéphane Couture & Eric Langlais, 2009. "Amenities and Risk in Forest Managemen," Working Papers - Cahiers du LEF 2009-01, Laboratoire d'Economie Forestiere, AgroParisTech-INRA. [Downloadable!]
    Other versions:
  8. Pekka Ilmakunnas & Mika Maliranta, 2003. "Technology, Labor Characteristic and Wage-productivity Gaps," Discussion Papers 860, The Research Institute of the Finnish Economy. [Downloadable!]
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  9. Erkki Koskela & Rune Stenbacka, 2003. "Profit Sharing and Unemployment: An Approach with Bargaining and Efficiency Wage Economics," Discussion Papers 863, The Research Institute of the Finnish Economy. [Downloadable!]
  10. Ville Kaitila, 2003. "An Assessment of Russia´s Growth Prospects in 2003 - 2010," Discussion Papers 869, The Research Institute of the Finnish Economy. [Downloadable!]
  11. Lotta Väänänen, 2003. "Does Public Funding Have a Halo Effect?," Discussion Papers 853, The Research Institute of the Finnish Economy. [Downloadable!]
  12. Kari Alho, 2003. "The Impact of Regionalism on Trade in Europe," Discussion Papers 843, The Research Institute of the Finnish Economy. [Downloadable!]
  13. Gregory Amacher & Erkki Koskela & Markku Ollikainen, 2003. "Quality Competition and Social Welfare in Markets with Partial Coverage: New Results," Discussion Papers 851, The Research Institute of the Finnish Economy. [Downloadable!]
  14. Heli Koski & Carolina Sierimo, 2003. "Entry and Exit in the ICT Sector - New Markets, New Industrial Dynamics?," Discussion Papers 847, The Research Institute of the Finnish Economy. [Downloadable!]
  15. Pekka Ilmakunnas & Mika Maliranta, 2003. "Worker Inflow, Outflow, and Churning," Discussion Papers 861, The Research Institute of the Finnish Economy. [Downloadable!]
    Other versions:
  16. Esa Viitamo, 2003. "Knowledge-intensive Services and Competitiveness of the Forest Cluster," Discussion Papers 845, The Research Institute of the Finnish Economy. [Downloadable!]
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