diff --git a/packages/@headlessui-react/src/components/combobox/combobox.test.tsx b/packages/@headlessui-react/src/components/combobox/combobox.test.tsx
index a4df3818a9..54c679482f 100644
--- a/packages/@headlessui-react/src/components/combobox/combobox.test.tsx
+++ b/packages/@headlessui-react/src/components/combobox/combobox.test.tsx
@@ -460,6 +460,46 @@ describe('Rendering', () => {
       })
     )
 
+    it(
+      'selecting an option puts the display value into Combobox.Input when displayValue is provided (when value is undefined)',
+      suppressConsoleLogs(async () => {
+        function Example() {
+          let [value, setValue] = useState(undefined)
+
+          return (
+            <Combobox value={value} onChange={setValue}>
+              <Combobox.Input
+                onChange={NOOP}
+                displayValue={(str?: string) => str?.toUpperCase() ?? ''}
+              />
+              <Combobox.Button>Trigger</Combobox.Button>
+              <Combobox.Options>
+                <Combobox.Option value="a">Option A</Combobox.Option>
+                <Combobox.Option value="b">Option B</Combobox.Option>
+                <Combobox.Option value="c">Option C</Combobox.Option>
+              </Combobox.Options>
+            </Combobox>
+          )
+        }
+
+        render(<Example />)
+
+        // Focus the input
+        await focus(getComboboxInput())
+
+        // Type in it
+        await type(word('A'), getComboboxInput())
+
+        // Stop typing (and clear the input)
+        await press(Keys.Escape, getComboboxInput())
+
+        // Focus the body (so the input loses focus)
+        await focus(document.body)
+
+        expect(getComboboxInput()).toHaveValue('')
+      })
+    )
+
     it(
       'conditionally rendering the input should allow changing the display value',
       suppressConsoleLogs(async () => {
diff --git a/packages/@headlessui-vue/CHANGELOG.md b/packages/@headlessui-vue/CHANGELOG.md
index 1cab876079..17a84b8414 100644
--- a/packages/@headlessui-vue/CHANGELOG.md
+++ b/packages/@headlessui-vue/CHANGELOG.md
@@ -7,7 +7,9 @@ and this project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0
 
 ## [Unreleased]
 
-- Nothing yet!
+### Fixed
+
+- Call `displayValue` with a v-model of `ref(undefined)` on `ComboboxInput` ([#1865](https://github.com/tailwindlabs/headlessui/pull/1865))
 
 ## [1.7.2] - 2022-09-15
 
diff --git a/packages/@headlessui-vue/src/components/combobox/combobox.test.ts b/packages/@headlessui-vue/src/components/combobox/combobox.test.ts
index a7c7b21b30..0bbf63e00e 100644
--- a/packages/@headlessui-vue/src/components/combobox/combobox.test.ts
+++ b/packages/@headlessui-vue/src/components/combobox/combobox.test.ts
@@ -493,6 +493,43 @@ describe('Rendering', () => {
       })
     )
 
+    // This really is a bug in Vue but we have a workaround for it
+    it(
+      'selecting an option puts the display value into Combobox.Input when displayValue is provided (when v-model is undefined)',
+      suppressConsoleLogs(async () => {
+        let Example = defineComponent({
+          template: html`
+            <Combobox v-model="value">
+              <ComboboxInput :displayValue="(str) => str?.toUpperCase() ?? ''" />
+              <ComboboxButton>Trigger</ComboboxButton>
+              <ComboboxOptions>
+                <ComboboxOption value="a">Option A</ComboboxOption>
+                <ComboboxOption value="b">Option B</ComboboxOption>
+                <ComboboxOption value="c">Option C</ComboboxOption>
+              </ComboboxOptions>
+            </Combobox>
+          `,
+          setup: () => ({ value: ref(undefined) }),
+        })
+
+        renderTemplate(Example)
+
+        // Focus the input
+        await focus(getComboboxInput())
+
+        // Type in it
+        await type(word('A'), getComboboxInput())
+
+        // Stop typing (and clear the input)
+        await press(Keys.Escape, getComboboxInput())
+
+        // Focus the body (so the input loses focus)
+        await focus(document.body)
+
+        expect(getComboboxInput()).toHaveValue('')
+      })
+    )
+
     it('conditionally rendering the input should allow changing the display value', async () => {
       let Example = defineComponent({
         template: html`
diff --git a/packages/@headlessui-vue/src/components/combobox/combobox.ts b/packages/@headlessui-vue/src/components/combobox/combobox.ts
index 157255ae4a..d287ac7cbd 100644
--- a/packages/@headlessui-vue/src/components/combobox/combobox.ts
+++ b/packages/@headlessui-vue/src/components/combobox/combobox.ts
@@ -629,11 +629,20 @@ export let ComboboxInput = defineComponent({
       }
     }
 
+    // Workaround Vue bug where watching [ref(undefined)] is not fired immediately even when value is true
+    const __fixVueImmediateWatchBug__ = ref('')
+
     onMounted(() => {
-      watch([api.value], () => (currentValue.value = getCurrentValue()), {
-        flush: 'sync',
-        immediate: true,
-      })
+      watch(
+        [api.value, __fixVueImmediateWatchBug__],
+        () => {
+          currentValue.value = getCurrentValue()
+        },
+        {
+          flush: 'sync',
+          immediate: true,
+        }
+      )
 
       watch(
         [currentValue, api.comboboxState],