Before discussing the type of institutions that can be designed for overcoming the credibility problem raised by monetary policy, this paper defines macroeconomic instability, showing that inflation is a crucial factor. The relationships between inflation and macroeconomic instability are analysed using a small Australian-type model, with rational expectations, where a too-high rate of inflation entails a continuum of equilibria, regarded as the root of macroeconomic instability. The credibility issue is then discussed in a simple optimal seignorage framework. Different institutional solutions, ranging from currency board to IMF conditionality, are discussed. Copyright 1999 by Oxford University Press.