A Dornbusch model with overlapping multi-period wage contracts and rational expectations is specified and estimated with Canadian and U.S. data. Estimated wage-price dynamics imply a typical contract length of about six quarters. Simulations indicate: 1) the exchange rate overshoots following a permanent money supply shock; 2) managed floating exacerbates the impact of foreign business cycles on the Canadian economy; 3) anticipated cold-turkey disinflation is fairly cheap in terms of lost output.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
561.
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