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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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    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. 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.
    8. 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.
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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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    More about this item

    Keywords

    stochastic preferences; preference uncertainty;

    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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