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...

This paper reconsiders McCallum's minimal-state-variable technique for selecting a single, bubble-free solution to a rational expectations model. I argue this technique bears a strong structural similarity to the conventional stability conditions, and when these approaches fail to yield a unique...

These notes review the theory of linear differential and difference equations at the first-year graduate economics student level. The mathematical trick of transforming a system into canonical form, which I take to be diagonal, is applied to continuous and discrete time systems and perfect...

We examine the credibility of disinflation policy in an economy with staggered wage contracts. The dynamic inconsistency of the government's optimal plan is the source of the credibility problem. If the government cannot commit to future actions, then the optimal plan is no credible. We argue...

The relations between Canadian and U.S. prices and output are compared during fixed and flexible exchange rate regimes. Correlations are high at all frequencies for all three regimes. The results suggest that the insulation potential of a flexible exchange rate is weak and/or that the Bank of...

Various popular exchange rate models (a standard monetary model, a portfolio balance model, and sticky-price models) are estimated and evaluated using U.S.-Canadian data for the 1970s. Nonnested hypothesis tests demonstrate that none are correctly specified. The data suggest: 1) the exchange...

Dynamic inconsistency provides a theoretical basis for discussions of policy credibility: when the government cannot commit its future policies, the incentive to deviate from the 'optimal' plan renders it incredible. We derive the best policy in the absence of precommitment as the feedback Nash...

In many macroeconomic models with rational expectations, optimal policy is time inconsistent, and therefore announced policy may not be credible. This paper models the government's credibility explicitly, using Kreps and Wilson's analysis. Time-consistent optimal government policy emerges as a...

We examine the economy after a regime change, when neither the policy nor the reactions of the public are known. This is an application of Kreps and Wilson's reputation model to Barro and Gordon's macroeconomic policy game. Equilibrium is defined as the dynamically consistent solution to a game...

A vector autoregression is estimated for the U.S. and Canada to elicit the "facts" concerning the exchange rate, money, prices, current account balances and other macro variables. I use a stylized version of Dornbusch's "sticky-price" model for comparison, since interpretation is difficult...