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Modelling Stochastic Relative Preferences

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  • Geraats, P.M.

Abstract

Stochastic relative preferences are prevalent in the literature, but it appears that modeling them is not trivial. This paper establishes that common stochastic specifications alter average relative preferences, which could induce spurious effects. A simple solution is presented that provides an unbiased specification that parameterizes pure white noise shocks to relative preferences. The importance of the results is illustrated by some instructive examples from consumer choice, monetary policy and micro- founded business cycle models.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0468.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0468.

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Length: 34
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:cam:camdae:0468

Note: MA, ET
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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: stochastic preferences; preference uncertainty;

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References

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  1. Beetsma, Roel M W J & Jensen, Henrik, 2003. " Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 129-36, February.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research, Working Paper Series qt5pf7g8sh, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January.
  4. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research, Working Paper Series qt6412m5b7, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  5. S[empty]rensen, Jan Rose, 1991. "Political uncertainty and macroeconomic performance," Economics Letters, Elsevier, vol. 37(4), pages 377-381, December.
  6. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  7. Hildenbrand, Werner, 1971. "Random preferences and equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 3(4), pages 414-429, December.
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Cited by:
  1. Petra M. Geraats, 2006. "The Mystique of Central Bank Speak," Working Papers 123, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Geraats, P.M., 2005. "Political Pressures and Monetary Mystique," Cambridge Working Papers in Economics 0557, Faculty of Economics, University of Cambridge.

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