LIMITED-DEPENDENT RATIONAL-EXPECTATIONS MODELS WITH STOCHASTIC THRESHOLDS

This paper extends the standard limited-dependent, rational expectatio ns model to allow for stochastic variations in the bounds. We show tha t the degree of non-linearity relating expectations to fundamentals te nds to decline as the band becomes less predictable. Monte Carlo exper iments indicate that the assumption that the band is perfectly predict able by the agents (when inappropriate) can seriously bias the estimat es and the inferences based on them.