SIMPLE APPROACH FOR DECIDING: Introduction 3

In both cases, the rules that are derived have the advantage that they provide an unambiguous relation between an easily observable variable and firm investment. This is important from an empirical standpoint because the fact that no such relation had been identified hampered the ability to test the theory. For instance, the ambiguous effect of […]

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SIMPLE APPROACH FOR DECIDING: Introduction 2

Thus the option to delay will have value even when project cash flows are riskless. This implies two things. On the one hand, since interest rates affect the value of all projects, the simple NPV rule cannot be applied to any investment that can be postponed regardless of the nature of the cash flows. On […]

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SIMPLE APPROACH FOR DECIDING: Introduction

It has long been recognized that the simple net present value (NPV) rule for deciding whether to invest in a project provides an unambiguously correct answer only under certain conditions. In particular, if the investment decision can be delayed, the investment is not fully reversible and there is some anticipated resolution of uncertainty that might […]

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OPEN-ECONOMY MARKET: Conclusions 5

First, the arguments regarding this issue are typically expressed in terms of cases in which only one variable is relevant — see Svensson (1998, p. 2) and Rudebusch and Svensson (1998, pp. 8-9). Second, multiple variable cases have led in practice to questionable terminology. For example, optimal central bank behavior when both Ap, and у, […]

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