It´s no good having an “escape hatch” if you act stupid once you´re out!

Tyler Cowen has some observations on the “Danish affair”:

Denmark’s central bank governor pledged to face down speculators testing its currency peg to the euro, saying he would do “whatever it takes” to defend it.

Lars Rohde told the Financial Times that Nationalbank could “go on forever” defending the peg, after lowering interest rates four times in three weeks to a global record low of minus 0.75 per cent. It has also swelled its balance sheet to a record size by printing krone in an attempt to weaken the Danish currency. “The main message is that we are ready to do whatever it takes to defend the peg. We have unlimited access to Danish krone and we have no restrictions on our balance sheet,” he said, in his first public comments since the recent quadruple rate cuts.

The FT article is here, here is Bloomberg coverage.  I would bet against them, in any case this will be a neat test case for our judgments of Switzerland.  The Danish government also has stopped selling bonds to help maintain the peg; Lord Polonius comments on that policyThe Danes have announced a true pre-commitment, in a way the Swiss never did, now let’s see what happens.  Defense of the peg is in fact their only official monetary policy target, and the central bank head claims it is supported by all segments of Danish society.

Scott Sumner commented:

The Danes have an escape hatch that the Swiss did not have, they can join the euro whenever they wish. Thus the Danish central bank can pocket huge profits from European speculators for as long as they wish, and then if their balance sheet gets uncomfortable they can join the euro at the drop of a hat. There are very few countries in such an enviable position. (Even so, I think the peg is a bad idea–they should let their currency float, as the Swedes do).

That´s not really an “escape hatch”; it´s making the pre-commitment “absolute” (and jump headlong into a cesspool of trouble!)

The Swedes were not bound. But that didn´t help them much. There´s no “antidote” to stupidity.

The top chart shows NGDP relative to trend for the EZ, Denmark and Sweden.

Escape Hatch_1

Comparing Denmark to the EZ, we observe that when Denmark´s NGDP was rising faster than the EZ´s, Denmark had to step on the monetary brakes. When some months later the ECB raised rates, Denmark had to follow suit.

This is shown on the Policy Rates chart below. Why did Sweden, which was doing quite a bit better than either Denmark or the EZ, and being free to pursue its own interest free from “pegs”, stepped on the brakes sooner and much harder? Ans: In addition to fears about oil prices, just like the ECB, they were also worried about asset price bubbles!!!

Escape Hatch_2


One thought on “It´s no good having an “escape hatch” if you act stupid once you´re out!

  1. Some monetary policies appear to benefit no one, such as the recent policies of the Swiss National Bank.
    Why do not the Danes declare a national tax holiday and print money to replace the lost tax revenue? In this scenario the average Dane would actually benefit from monetary policy.

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