On Forest Rotation Under Interest Rate Variability
AbstractThe 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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 840.
Length: 14 pages
Date of creation: 2003
Date of revision:
Other versions of this item:
- Alvarez, Luis H R & Koskela, Erkki, 2003. "On Forest Rotation under Interest Rate Variability," International Tax and Public Finance, Springer, vol. 10(4), pages 489-503, August.
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.:
- Markku Ollikainen & Erkki Koskela, 2001. "Optimal Private and Public Harvesting under Spatial and Temporal Interdependence," CESifo Working Paper Series 452, CESifo Group Munich.
- 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.
- Luis H. R. Alvarez & Erkki Koskela, 2001.
"Wicksellian Theory of Forest Rotation under Interest Rate Variability,"
CESifo Working Paper Series
606, CESifo Group Munich.
- Alvarez, Luis H. R. & Koskela, Erkki, 2005. "Wicksellian theory of forest rotation under interest rate variability," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 529-545, March.
- 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.
- 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.
- 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.
- Samuelson, Paul A, 1976. "Economics of Forestry in an Evolving Society," Economic Inquiry, Western Economic Association International, vol. 14(4), pages 466-92, December.
- Hartman, Richard, 1976. "The Harvesting Decision When a Standing Forest Has Value," Economic Inquiry, Western Economic Association International, vol. 14(1), pages 52-58, March.
- Brunette, Marielle & Couture, Stéphane & Langlais, Eric, 2009.
"Amenities and Risk in Forest Management,"
14743, University Library of Munich, Germany.
- Luis H. R. Alvarez & Erkki Koskela, 2004.
"Taxation and Rotation Age under Stochastic Forest Stand Value,"
CESifo Working Paper Series
1211, CESifo Group Munich.
- Alvarez, Luis H.R. & Koskela, Erkki, 2007. "Taxation and rotation age under stochastic forest stand value," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 113-127, July.
- Buongiorno, Joseph & Zhou, Mo, 2011. "Further generalization of Faustmann's formula for stochastic interest rates," Journal of Forest Economics, Elsevier, vol. 17(3), pages 248-257, August.
- Alvarez, Luis H.R. & Koskela, Erkki, 2006.
"Does risk aversion accelerate optimal forest rotation under uncertainty?,"
Journal of Forest Economics,
Elsevier, vol. 12(3), pages 171-184, December.
- Luis H. R. Alvarez & Erkki Koskela, 2004. "Does Risk Aversion Accelerate Optimal Forest Rotation under Uncertainty?," CESifo Working Paper Series 1285, CESifo Group Munich.
- Thang, Tran Cong & Burton, Michael P. & Brennan, Donna C., 2009. "Optimal replanting and cutting rule for coffee farmers in Vietnam," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47638, Australian Agricultural and Resource Economics Society.
- Shackleton, Mark B. & Sødal, Sigbjørn, 2010. "Harvesting and recovery decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2533-2546, December.
- Sylvain Caurla & Philippe Delacote & 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.
- Zhou, Mo & Buongiorno, Joseph, 2011. "Effects of stochastic interest rates in decision making under risk: A Markov decision process model for forest management," Forest Policy and Economics, Elsevier, vol. 13(5), pages 402-410, June.
- Olivier Damette & Philippe Delacote, 2009. "The environmental resource curse hypothesis: the forest case," Working Papers - Cahiers du LEF 2009-04, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.
- Luis H.R. Alvarez E., 2006. "Irreversible Investment, Incremental Capital Accumulation, and Price Uncertainty," Discussion Papers 4, Aboa Centre for Economics.
- Creamer, Selmin F. & Genz, Alan & Blatner, Keith A., 2012. "The Effect of Fire Risk on the Critical Harvesting Times for Pacific Northwest Douglas-Fir When Carbon Price Is Stochastic," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 41(3), December.
- Julia Touza & Charles Perrings & María Chas Amil, 2010. "Harvest Decisions and Spatial Landscape Attributes: The Case of Galician Communal Forests," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(1), pages 75-91, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kaija Hyvönen-Rajecki).
If references are entirely missing, you can add them using this form.