![]() Danmarks Nationalbank will buy kroner and sell euros if the exchange rate of the krone is moving away from the central rate in a depreciating direction – and conversely sell kroner and buy euros if the krone rate is moving away from the central rate in an appreciating direction. If the exchange rate of the krone moves away from the central rate, Danmarks Nationalbank can intervene – i.e. Danmarks Nationalbank generally uses two instruments to keep the krone stable against the euro: intervention and interest rate adjustment. Danmarks Nationalbank is responsible for ensuring that the exchange rate of the krone does not reach the upper or lower limits in the fluctuation band, but preferably stays close to the central rate. The exchange rate of the krone against the euro is determined by the supply of and demand for kroner relative to euros. How does Danmarks Nationalbank manage the exchange rate of the krone in practice? ![]() ![]() There are no upper or lower limits on how much the exchange rate (price) of, say, the Swedish krona or the US dollar can move. The krone is floating against all other currencies but the euro. Since the late 1990s, Danmarks Nationalbank has, in practice, stabilised the krone at a level much closer to the central rate. Because of the high degree of convergence, Denmark has concluded an agreement with the ECB on a narrower ERM II fluctuation band of +/- 2.25 per cent.This means that the krone can only fluctuate between 762.824 kroner per 100 euro and 729.252 kroner per 100 euro. What is the central rate of Danish kroner?ĭenmark participates in ERM II at a central rate of 746.038 kroner per 100 euro. The European Central Bank (ECB) and the individual member state have an obligation to ensure that the currency observes the fluctuation bands. Denmark does not participate with a view to joining the euro, but only because ERM II provides a framework for its fixed exchange rate policy. As part of the convergence criteria, countries wishing to join the euro must participate in ERM II and observe the fluctuation band for at least two years. The value of the currencies may fluctuate within a band of +/- 15 per cent against the central rate. The euro is at the core of ERM II, and countries participating in the programme have central rates against the euro, but not against each other’s currencies. The European Exchange Rate Mechanism (ERM II) is the formal framework for the Danish fixed exchange rate policy. Despite turbulence surrounding the Swedish krona in 1982 and the foreign exchange crises of the early 1990s, adjustment of the exchange rate of the krone has not been used actively in Danish economic policy, and the krone’s central rate against the D-mark and then against the euro has been unchanged since January 1987. The decision to pursue a fixed exchange rate policy without adjusting the exchange rate for economic policy purposes was made following a period of high unemployment and inflation and major imbalances in the Danish economy. Since when has Denmark pursued a fixed exchange rate policy?ĭenmark has been conducting a fixed exchange rate policy since 1982 – initially against the German D-mark and then against the euro. As the euro area’s inflation target is 2 per cent over the medium term, the fixed exchange rate policy creates a framework for low inflation in Denmark. Why does Denmark pursue a fixed exchange rate policy?ĭenmark pursues a fixed exchange rate policy to ensure low and stable prices. A stability-oriented fiscal policy is also essential for maintaining the fixed exchange rate policy. The government ensures that fiscal policy and all other economic policies support a stable economy. ![]() The result is a clear division of responsibility for the economic policy. Danmarks Nationalbank is free to conduct the monetary policy as it sees fit, and neither the Danish Parliament (Folketinget) nor the government can decide the monetary policy. In other words, the sole purpose of Denmark’s monetary policy is to keep the krone stable against the euro. Danmarks Nationalbank conducts monetary policy within the framework of the fixed exchange rate policy. In Denmark, the government, in consultation with Danmarks Nationalbank, determines the foreign exchange policy to be conducted.
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