Theory and practice of monetary policy

Summary. We consider an optimally managed renewable resource with stochastic non-concave growth function. We characterize the conditions under which the optimal policy leads to global extinction, global conservation and the existence of a safe standard of conservation. Our conditions are specified in terms of the economic and ecological primitives of the model: the biological growth function, the welfare function, the distribution of shocks and the discount rate. Our results indicate that, unlike deterministic models, extinction and conservation in stochastic models are not determined by a simple comparison of the growth rate and the discount rate; the welfare function plays an important role.Received: 20 October 2004, Revised: 28 February 2005, JEL Classification Numbers: D90, O11, O41, Q32.Santanu Roy: Correspondence toResearch on this paper was completed when the second author visited Cornell University in July, 2003. We thank the Center for Analytic Economics and the Department of Economics at Cornell University for making this research visit possible. The current version has gained considerably from the comments made by an anonymous referee.