If your dog is use to being banished from the upstairs then this way of living should be continued. You do not want to change the way she thinks. It would be regressing in an issue you already established.

I think the bottom line is if you continue to pay attention to Gracie and let her near the baby without punishing her or telling her all the time to go lay down, etc... she should be fine. It will work out if you a diligent in the beginning especially to pay her continued attention.

I was just wondering.... from the sounds of it your bedroom is not upstairs? If this is accurate will you be relocating your room to be closer to the baby? Does your dog sleep in your room downstairs?