Exchange Rate Dynamics in a Model with Staggered Wage Contracts

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.