tend to limit economic fluctuations. overall, the policy framework has delivered strong results. compared to most other countries, we have enjoyed a stable macroeconomic environment. the long history of the exchange rate peg means that all agents in the economy make decisions based on its existence : page 4 of 8 firms and households set wages knowing that a loss in competitiveness will not be offset by a depreciation of the exchange rate. this has ensured price and wage stability – and firmly anchored inflation expectations. banks implicitly support the peg by engaging in what you could call ” stabilising speculation ” : they take positions, if the exchange rate starts to fluctuate. this illustrates the credibility of the peg in financial markets. the government also knows that monetary policy will not ” correct the mistakes ” made by fiscal policy. also, as an overly expansionary fiscal policy may reduce the credibility of the fixed exchange rate. this – to some extent – disciplines fiscal policy. the tendency to fiscal pro - cyclicality during the strong economic expansion in the mid - 2000s might well have been worse under a different monetary regime. to summarize, the peg to the d - mark / euro has served denmark well for more than three decades. from time to time the framework is, however, put to a test by strong capital in - or outflows. one such test occurred in january and february 2015 when denmark experienced a very large inflow of capital. the inflow started as the swiss national bank announced on 15 january that they would no longer prevent the swiss franc from appreciating against the euro. to prevent the krone from appreciating, danmarks nationalbank responded by intervening in the fx market followed by interest rate reductions. with effect from 6 february, the rate on certificates of deposits was reduced to - 0. 75 per cent. this was a level that had not been seen previously. as the inflow of capital started, its width and depth was not known. this induced us to reduce rates gradually. danmarks nationalbank's monetary policy interest rates were transmitted to money - market interest rates. control of the difference between money - market rates in the euro area and denmark – the interest - rate spread – is crucial for controlling the exchange rate. and the experience clearly showed that the interest rate spread is also effective during episodes of negative interest rates and appreciation pressure on the krone. these conventional measures were supplemented by extraordinary measures such as the temporary suspension of the issuance of government bonds

was cut from almost 9 to just over 4 per cent, was largely a question of confidence in the inflation target become established and enabling a substantial cut in the policy rate. the substantial rate cut in connection with the global financial crisis, from 4. 75 to 0. 25 per cent within the course of a year, was also special, as crises of this kind are fortunately rare ( see figure 3 ). in the united states, which has a longer history of a floating exchange rate, it is usually estimated that the policy rate is cut by around 5 percentage points in economic downturns. 5 it is reasonable to assume that in sweden, which is a small open economy, a larger share of the adjustment in an economic downturn will come through the exchange rate than is the case in the united states. let us say, without claiming any scientific exactness, that it would be desirable to cut the repo rate by 2. 5 – 3 percentage points in a normal economic downturn. if the downturn were to occur at the beginning of 2021 and the policy rate were cut 4 rudebusch ( 2016 ) shows that the probability of an economic upturn being broken does not now increase in proportion to the time it has lasted. however, this was the case with the economic upturns prior to the second world war. 5 see, for example, summers ( 2018 ). 3 from 0. 75 to – 0. 5 per cent, the cut would be 1. 25 percentage points, that is much less than the estimated 2. 5 – 3 percentage points. 6 raising the repo rate to have ammunition ready? here i should like to briefly touch on a particular question before i go on. if one is concerned that the repo rate will not be sufficiently high when the next economic downturn comes, can one not just raise it to a suitable level now, as a preventive measure – so that there is ammunition available when needed? this is an argument sometimes put forward in the general debate. but unfortunately there are a number of problems with this argument. firstly, the economy will of course be affected by interest rate increases. growth would slow down and inflation would fall. if one raises the rate quickly and substantially, one might even cause the economic downturn one was ultimately aiming to prevent. but even if this was not the case then, secondly, a very probable scenario would be that inflation nevertheless fell substantially, perhaps down to 1 per cent or lower, that is, to the