Abstract

Limited credibility increases the likelihood of financial crises, raises the employment costs of stabilization policy and the cost of capital to government, and generally reduces the allocative efficiency of the capital market. My paper surveys current conventional wisdom concerning the institutions conducive to maintaining a stable internal and external value of the currency and applies its lessons to the current Swedish situation. The paper’s basic premise is that Swedish monetary policy should be directed mostly to the twin objectives of achieving and maintaining price stability and a high level of credibility. The paper poses the question of whether Sweden should join a European monetary union, if such a union is created, or whether it should try to maintain price stability and credibility by other means.