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Commitment as investment under uncertainty

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  • Joseph A. Ritter
  • Joseph H. Haubrich

Abstract

Irreversible investment and the techniques associated with pricing real options have led to significant advances many areas. We broaden this range of applications, showing how the techniques can apply to many policy problems in finance, macroeconomics, and trade policy. With small changes, standard techniques can handle a broad range of strategic problems related to policy. The decision to commit is like the decision to make an irreversible investment. Explicitly considering and correctly valuing the option to wait makes discretion relatively more attractive, implies that increased uncertainty increases the gain to discretion, and results in policy which displays hysteresis.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1995-004.

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Date of creation: 1996
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Handle: RePEc:fip:fedlwp:1995-004

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Keywords: Investments;

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  1. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September.
  2. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  3. Lambson, Val Eugene, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 125-42, January.
  4. Joseph G. Haubrich & Joseph A. Ritter, 1996. "Dynamic commitment and imperfect policy rules," Working Paper 9601, Federal Reserve Bank of Cleveland.
  5. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  6. George J. Mailath & Loretta J. Mester, 1993. "A positive analysis of bank closure," Working Papers 93-10/R, Federal Reserve Bank of Philadelphia.
  7. Flood, Robert P & Garber, Peter M, 1984. "Gold Monetization and Gold Discipline," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 90-107, February.
  8. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Harvard Institute of Economic Research Working Papers 1713, Harvard - Institute of Economic Research.
  9. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
  10. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  11. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Pindyck, Robert S., 1975. "Optimal stabilization policies under decentralized control and conflicting objectives," Working papers 765-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  15. Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
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