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Reevaluating Swedish Membership in the European Monetary Union

Reevaluating Swedish Membership in the European Monetary Union

Evidence from an Estimated Model

(p.379) 10 Reevaluating Swedish Membership in the European Monetary Union
Europe and the Euro
Ulf Söderström
University of Chicago Press

In Sweden, the exchange rate to a large extent has acted to destabilize rather than to stabilize the economy, pointing to the potential risks of an independent monetary policy. This chapter details the report of the Calmfors Commission, the government commission assigned to study the consequences of EMU membership in 1995 and 1996 and summarizes the main conclusions of the Commission, and provides an updated evaluation of the arguments made in the report. Some of these arguments speak more strongly in favor of Swedish EMU membership today than in 1996, while others more clearly speak against membership. It concerns European business cycles and discusses the comovement between the Swedish and European economies. European business cycles are closely correlated with each other, suggesting that business cycles in Europe are largely driven by common shocks. This evidence indicates that membership in EMU would not be very costly for Sweden, and not more so than for some current EMU members. The estimated model suggests that country-specific shocks are an important source of Swedish business cycle fluctuations, and therefore that participation in the monetary union may be costly. The model interprets most fluctuations in the exchange rate as caused by shocks to the exchange rate risk premium, rather than endogenous movements that help the economy adjust after disturbances to other sectors in the economy.

Keywords:   Sweden, business cycles, European economies, comovement, EMU membership

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