Inflation, Uncertainty, and Investment (Classic Reprint) - Softcover

Baldwin, Carliss Y.

Softcover

ISBN 10: 1334476152 ISBN 13: 9781334476150

Publisher: Forgotten Books, 2019

Synopsis

Excerpt from Inflation, Uncertainty, and Investment

This paper considers the effects of inflation, interest rates and uncertainty on a firm's choice between assets of different lives. We first focus on the impact of inflation and interest rates on the value of nominal depreciation tax shields. We find that the effect of an inflation-induced increase in nominal interest rates on the breakeven prices of short and long-lived assets is not monotonic. At low initial nominal interest rates, an increase in the interest rate increases the maximum price that the firm is willing to pay for the short-lived asset relative to the long-lived asset. At some point, the effect reverses so that a further increase in interest rates reduces the maximum or breakeven price of the short-lived asset. Simulation results indicate that these changes occur at rates that are within the range of recent u.s. Experience, 52 to 202.

Second, we focus on the impact of relative price uncertainty on the decision to choose a short or long-lived asset. We find that uncertainty increases the breakeven price of shorter-lived assets: in other words, given uncertainty about future relative prices, short-lived assets will be chosen over long - lived assets at higher prices than under certainty. The change in the breakdown price occurs because both long and short-lived assets have a valuable switching option. The Option is more valuable for short-lived assets because the opportunity to switch occurs sooner.

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About this title

About the Author

us Senior Associate Dean and William l. White Professor of Business Administration.

Edition details

• Publisher: Forgotten Books
• Publication date: 2019
• Language: English
• ISBN 10: 1334476152
• ISBN 13: 9781334476150
• Binding: Paperback
• Number of pages: 27