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Commitment as investment under uncertainty

  • Joseph A. Ritter
  • Joseph G. Haubrich

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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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
Date of revision:
Handle: RePEc:fip:fedlwp:1995-004
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  1. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  2. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
  3. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
  4. 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.
  5. George J. Mailath & Loretta J. Mester, 1993. "A positive analysis of bank closure," Working Papers 94-2, Federal Reserve Bank of Philadelphia.
  6. Robert P. Flood & Peter M. Garber, 1980. "Gold Monetization and Gold Discipline," NBER Working Papers 0544, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
  9. Joseph G. Haubrich & Joseph A. Ritter, 1998. "Dynamic commitment and imperfect policy rules," Working Papers 1995-015, Federal Reserve Bank of St. Louis.
  10. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
  11. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  12. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
  13. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
  15. Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
  16. Val Eugene Lambson, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 125-142.
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