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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.

Suggested Citation

  • Geraats, P.M., 2004. "Modelling Stochastic Relative Preferences," Cambridge Working Papers in Economics 0468, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0468
    Note: MA, ET
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    1. 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.
    2. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 223-250, January.
    3. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Department of Economics, Working Paper Series qt5pf7g8sh, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. S[empty]rensen, Jan Rose, 1991. "Political uncertainty and macroeconomic performance," Economics Letters, Elsevier, vol. 37(4), pages 377-381, December.
    5. HILDENBRAND, Werner, 1971. "Random preferences and equilibrium analysis," LIDAM Reprints CORE 100, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    7. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Department of Economics, Working Paper Series qt6412m5b7, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    8. Maurice Obstfeld & Kenneth Rogoff, 2002. "Global Implications of Self-Oriented National Monetary Rules," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 503-535.
    9. 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 129-136, February.
    10. Hildenbrand, Werner, 1971. "Random preferences and equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 3(4), pages 414-429, December.
    11. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
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    Cited by:

    1. Geraats, P.M., 2005. "Political Pressures and Monetary Mystique," Cambridge Working Papers in Economics 0557, Faculty of Economics, University of Cambridge.
    2. Petra M. Geraats, 2007. "The Mystique of Central Bank Speak," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 37-80, March.

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    Keywords

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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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