Is the Exchange Rate a Shock Absorber? The Case of Sweden

The final stages of European Monetary Unification (EMU) have motivated research into the pros and cons of adopting a common currency. The biggest change occurring under a currency union is the loss of the exchange rate as an instrument of macroeconomic adjustment. According to the literature, a single currency would reduce transactions and information costs but could prove costly in the face of asymmetric shocks or price rigidities (Mundell 1961). Moreover, the costs of a single currency would be smaller if labor and capital were sufficiently mobile and the trade regime was open (McKinnon 1963).