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On Forest Rotation under Interest Rate Variability

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Author Info
Alvarez, Luis H R
Koskela, Erkki
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 2003 by Kluwer Academic Publishers

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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:itaxpf:v:10:y:2003:i:4:p:489-503

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  1. Luis H. R. Alvarez & Erkki Koskela, 2004. "Taxation and Rotation Age under Stochastic Forest Stand Value," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. 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!]
  3. Luis H. R. Alvarez & Erkki Koskela, 2004. "Does Risk Aversion Accelerate Optimal Forest Rotation under Uncertainty?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Erkki Koskela & Matti Viren, 2003. "Government Size and Output Volatility: New International Evidence," Discussion Papers 857, The Research Institute of the Finnish Economy. [Downloadable!]
  5. 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!]
  6. 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!]
  7. 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!]
  8. 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!]
  9. 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!]
  10. 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!]
  11. 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!]
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  12. 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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  13. 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!]
  14. Luis H.R. Alvarez E., 2006. "Irreversible Investment, Incremental Capital Accumulation, and Price Uncertainty," Discussion Papers 4, Aboa Centre for Economics. [Downloadable!]
  15. Ville Kaitila, 2003. "An Assessment of Russia´s Growth Prospects in 2003 - 2010," Discussion Papers 869, The Research Institute of the Finnish Economy. [Downloadable!]
  16. Lotta Väänänen, 2003. "Does Public Funding Have a Halo Effect?," Discussion Papers 853, The Research Institute of the Finnish Economy. [Downloadable!]
  17. Pekka Ilmakunnas & Mika Maliranta, 2003. "Worker Inflow, Outflow, and Churning," Discussion Papers 861, The Research Institute of the Finnish Economy. [Downloadable!]
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  18. Kari Alho, 2003. "The Impact of Regionalism on Trade in Europe," Discussion Papers 843, The Research Institute of the Finnish Economy. [Downloadable!]
  19. 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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