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Introduction to monetary and foreign-exchange policy


Monetary policy


Foreign-exchange policy / ERM II


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Introduction to monetary and foreign-exchange policy


Danmarks Nationalbank is responsible for monetary policy in Denmark. Danmarks Nationalbank conducts monetary policy by setting the monetary-policy interest rates, i.e. the discount rate, the current-account rate, the lending rate and the rate of interest on certificates of deposit. The interest rates are determined by the Board of Governors of Danmarks Nationalbank, and can be changed as required at any time. Danmarks Nationalbank's interest rates guide the short-term interest rates in the Danish money market, as well as the deposit and lending rates that the banks offer customers.

Denmark maintains a fixed-exchange-rate policy vis-Ó-vis the euro area. This means that the aim of monetary and foreign-exchange policy is to keep the krone stable vis-Ó-vis the euro. The main objective of the monetary policy in the euro area is to maintain price stability, i.e. to avoid inflation. By keeping the krone stable vis-Ó-vis the euro, a basis for low inflation is also created in Denmark.

Danmarks Nationalbank can influence the krone rate by adjusting its monetary-policy interest rates. When Danmarks Nationalbank increases its interest rates relative to the interest rates of the European Central Bank (ECB), the krone will have a tendency to strengthen. When, on the other hand, Danmarks Nationalbank lowers its interest rates relative to the interest rates of the ECB, the krone will have a tendency to weaken.

In the short term Danmarks Nationalbank can stabilise the krone by buying and selling foreign currency in the market. When Danmarks Nationalbank sells foreign currency (and buys kroner), the krone will have a tendency to strengthen. When Danmarks Nationalbank buys foreign currency (and sells kroner), the krone will have a tendency to weaken.

When the foreign-exchange market is calm, the fixed-exchange-rate policy means that Danmarks Nationalbank adjusts its interest rates in step with the ECB's adjustments. In a situation with upward or downward pressure on the krone or a sustained inflow or outflow of foreign currency, Danmarks Nationalbank unilaterally changes its interest rates in order to stabilise the krone.

There is a clear distribution of responsibility for economic policy. The monetary policy of Danmarks Nationalbank is aimed solely at ensuring that the krone remains stable vis-Ó-vis the euro. The government conducts its fiscal policy and economic policy in general so as to achieve stable economic development and in accordance with a fixed exchange rate.






Last update: 02/14/2014

 
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