Comments on “Monetary policy in Denmark since 1992”

Exchange rate stability has been the cornerstone of Danish monetary policy in recent years. It is particularly important in this regard to assess the impact of the widening of the ERM bands in August 1993 on Danish monetary and exchange-rate strategy. Denmark has always been a defender of the old system of narrow bands for understandable reasons. Before the crisis of 1992–93, Denmark tended to make greater use of exchange rate movements within the band, as compared to the other two Basle-Nyborg instruments (namely, interest rate movements and inter-ventions). Denmark relied more than any other ERM country on the use of exchange rate movements, which proved to be stabilising due to the credibility of the limits. When the Danish krone tended to approach the fluctuation limits, self-stabilising capital movements pushed the exchange rate back towards the central parity. Even during the ERM crisis, when the limits proved to be destabilising for most currencies, the Danish krone seemed to enjoy greater credibility. However, on some occasions of generalised turmoil, co-ordinated intramarginal interventions by ERM central banks in favour of the Danish currency were necessary to avoid a realignment. The widening of the bands to ±15 % in August 1993 changed this envi-ronment. The results of this broadening of the formal limits were some-what paradoxical: short-term volatility of the exchange rates has been reduced for almost all participating currencies, not only compared to the period of tensions (1992–93), but also in comparison with the previous phase of stability (1987–92) (see Graph 1). This was also true for the Danish krone, as can be seen in Chart 10 of the Danish paper. Another indicator of the – to some extent surprising – greater stability of the new ERM of wider bands, is the reduction of the effective width of the band, defined as the distance between the weakest and the strongest currencies (see Graph 2). For most ERM countries, the widening of the bands appar-ently reduced the destabilising impact of the limits and increased the stabilising effect of the central parities. In the case of Denmark, thes