Modelling Stochastic Relative Preferences

Petra Geraats ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: stochastic preferences; preference uncertainty (search for similar items in EconPapers)
JEL-codes: D1 D8 E2 E5 (search for similar items in EconPapers)
Pages: 34
Date: 2004-11
New Economics Papers: this item is included in nep-mac and nep-mic
Note: MA, ET
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0468

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