Exchange Rate Regimes and Macroeconomic Stability : The Case of Sweden

In this paper I investigate the relevance of the exchange rate regime for macroeconomic stability. I simulate hypothetical macroeconomic developments under different hypothetical regimes in Sweden during the period 1974-1994. The main question is how stable output would have been if Sweden had had a floating exchange rate regime. Would it have been better with a floating exchange rate than the actual quasi-fixed regime? Also the development with an irrevocably fixed exchange rate is investigated. The results show that the choice of exchange rate regime does influence macroeconomic stability. More precisely, output volatility under the actual exchange rate regime is about the same as under the hypothetical floating exchange rate regime, but output is substantially more volatile under the hypothetical fixed exchange rate regimes