Abstract

Danish Monetary Policy During the Last Decade

Priorities of the general economic aims of monetary policy shifted during the period under review because considerations of external stability, especially after the currency crisis in 1969, outweighed considerations of internal stability. After 1965 the main feature of monetary-policy formulation has been a system of voluntary agreements (notably of quantitative nature) concluded between Danmarks Nationalbank and the organisations of the money and capital market institutions. Notwithstanding this system, however, it was a characteristic feature of the monetary policy pursued in those years that heavy reliance was placed on market mechanisms, notably in respect of interest policy. The general economic trend on which monetary policy was based may be divided into two periods: 1965 - 1973 and 1974 - 1977. More particularly, the swing from surpluses to large deficits on government budgets between the two periods gave rise to significant changes in monetary-policy instruments and target variables. The principal conclusion is that the monetary policy pursued during the period under review contributed significantly towards external stability and, to some extent, also towards internal stability by means of the high level of interest rates. Monetary policy thus discharged its main function. It may be argued, however, that the better monetary policy succeeds in ensuring the financing of the external payments deficit, the more difficult it is to win political acceptance of necessary adjustments in other fields of economic policy, so that it might have been preferable to pursue a less restrictive monetary policy in order to elicit such adjustments. However, with the meagre foreign-exchange reserves held by Denmark such a policy would soon have led to chaos - as borne out by the events experienced in 1968 and 1975. Monetary policy thus appears to have been overworked, especially in the last few years, which, among other things, has caused a persistent need to introduce new monetary-policy instruments which, however, gradually wear out. It appears, however, that there is growing political understanding of these problems and that this should lead to a shift of emphasis from monetary policy towards fiscal and incomes policy.