Danish Central Bank Stumbles with Its Currency Peg to the Euro

by Uffe Merrild

Denmark has been mentioned a few times during the American election campaign by Democrats who favor larger government and high redistribution of income, but also pundits like Paul Krugman have written about Denmark in his October 19th column at The New York Times. Fortunately most of his fiscal and general economic Keynesian points have been refuted in Episode 6 of Contra Krugman by Thomas Woods and Robert Murphy. But, some points regarding monetary policy need attention as well.

The Danish currency, the “krone,” was initially pegged in 1982 to the powerful and relatively low-inflationary German deutsche mark. The reason to introduce the fixed exchange rate policy was to avoid high inflation, loose monetary policy and to restrain the Danish politicians who had by then brought the country near bankruptcy. The fixed exchange-rate policy earned such tremendous political success that it has been in effect for 34 years and even today no other policy option is seriously considered.

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