The Danish exchange rate policy under attack
Describe the Danish exchange rate policy since joining the EF/EU in 1973.
Make an analysis of the situation stated in the case. Discuss and evaluate the Danish exchange rate policy and perspectives for future developments
Since 1973, Denmark has been an active member of the European Union also known as the EU. Denmark has been committed to establish an efficient and well-functioning internal market, transparent decision-making, and results that are clearly visible to individual citizens.
Denmark applied for the first time in 1961 to be a part of the European Economic Committee (EEC) which was exactly the same day the United Kingdom applied.
However, Denmark took back their application because the French president at that time, President of France Charles de Gaulle dismissed the application from the United Kingdom.
After a lot of negotiation back and forth between all countries, the presidency in France changed. After the presidency changed Denmark, Ireland and the United Kingdom all became a part of the European Economic Committee just a little over 11 years after their first application.
Right now, in Denmark the Danish government is working with Denmark's Nationalbank to decide on the foreign exchange policy to be managed. Denmark’s Nationalbank decided to manage the monetary policy within the foundation of fixed exchange rate policy.
This means that Denmark’s Nationalbank monetary policy is to make sure the Danish krone is stable in opposition to the euro.
Even though the Danish government is working with Denmark’s Nationalbank, the Nationalbank is independent and takes all the final decisions regarding the monetary policy in Denmark.
This means that Denmark’s National have most of the responsibility in form of economic policy in Denmark. An economic policy the Nationalbank is not responsible for is fiscal policy which is a government responsibility.
In relation to the fixed exchange rate policy to be maintained it is important for the fiscal policy to be stable. Government tax rates and its spending’s level is what we know as fiscal policy, and just how they keep track of and impact the country's economy.
Denmark’s Nationalbank has all the control over the monetary policy, which also means whenever they change the monetary policy, it changes things in the economy.
Which means when they change the monetary policy, the monetary policy interest rates also change, and when the interest rate changes the ECB gets noticed. This all means the exchange rates for the danish krone gets affected so it might change.
In all kinds of markets there is sometimes calm and other times a run. When the foreign exchange market in periods is calm, it’s usually there Denmark’s Nationalbank would change the interest rates.
They would change the interest rates when the market was calm to compliance with the ECB monetary interest rates policy.
If there was any pressure towards the danish krone no matter the circumstances Denmarks Nationalbank would without any doubt the interest rate in place for the krone to be stabilized.