This paper revisits Canada’s pioneering experience with a flexible exchange rate over the period 1950–62. It examines whether the floating rate was the best option for Canada in the 1950s by developing and estimating a New Keynesian small open-economy model of the Canadian economy. The model...

Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully rational expectations have difficulty...