Inflation Uncertainty And Investment

Cover Inflation Uncertainty And Investment
Inflation Uncertainty And Investment
Carliss Y Baldwin
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Furthermore, a higher degree of uncertainty about future values of C and C increases the option value and hence the breakeven price of the short-lived asset. 4. Conclusion 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 o...n 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.

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