All Rights Reserved
AccessEcon LLC 2006, 2008.
Powered by MinhViet JSC
ralph lauren polo

Joshua R Hendrickson
''Should the government increase investment in infrastructure improvements when interest rates decline?''
( 2015, Vol. 35 No.3 )
During recessions, the real interest rate declines and therefore a number of public investment projects might meet the net present value criteria. It has been argued that the government should increase public investment during these times. This paper begins with the assumption that the projects that the government would undertake in these situations are likely to be infrastructure improvement projects. This paper then uses the option theory of investment to determine the criteria for investment. In particular, the government solves an optimal stopping problem. The paper shows that if the government uses the real interest rate to discount the future, the effect of falling real interest rates on investment thresholds is ambiguous. It is therefore not obvious that the government should increase public investment when the real interest rate declines.
Keywords: optimal stopping time, public infrastructure, government spending, interest rates
JEL: H5 - National Government Expenditures and Related Policies National Government Expenditures and Related Policies: General
Manuscript Received : Aug 03 2015 Manuscript Accepted : Aug 12 2015

  This abstract has been downloaded 1002 times                The Full PDF of this paper has been downloaded 137308 times