WAITING TO INVEST - INVESTMENT AND UNCERTAINTY

The textbook analysis that accepts all projects with positive net present values as positive is quite generally wrong. The ability to delay a project means that almost every project competes with itself postponed. With uncertain interest rates, even the simplest of projects has an option value. The effect of interest-rate uncertainty on the optimal delay of investment is sizable. This implies that the rate of aggregate investment will depend on both the level of the real interest rate and the degree of interest-rate uncertainty. Furthermore, it is not necessarily true that investment rises with a fall in interest rates.