Fluctuating shadow prices in open economies impact investment timing.
Shadow prices in developing countries are often estimated assuming steady-state growth, but this may not reflect reality. By considering the dynamic evolution of the economy, including initial conditions and borrowing constraints, shadow prices for tradeables, nontradeables, labor, and interest rates can be more accurately calculated. Research on Cyprus shows that deviations from steady-state growth can lead to significant fluctuations in interest rates, emphasizing the importance of timing for investment projects.