. the central parity vis - a - vis the euro corresponds exactly to the former central rate vis - a - vis the d - mark, which was unchanged from early 1987, cf. chart 1. furthermore, by 1982, exchange - rate realignments had ceased to be a self - initiated danish policy instrument. the firm commitment to a fixed - exchange - rate policy originates from very poor performance of macroeconomic policy and, consequently, poor performance of the danish economy in the 1970s. against the background of high inflation, excessive budget deficits, permanent deficits on the current account of the balance of payments, frequent devaluations of the krone and high nominal interest rates, the danish authorities in the early 1980s made a successful u - turn to a stability - oriented macroeconomic regime. the fixed - exchange - rate policy was, and still is, an important element in the macroeconomic framework in denmark. see christensen and topp ( 1997 ) for a more detailed review of the change in danish economic policy in the aforementioned period. this paper builds heavily on jensen ( 2001 ). mishkin and schmidt - hebbel ( 2001 ) list 19 current and former inflation - targeting countries. see, for instance, bernanke and mishkin ( 1997 ), svensson ( 1997 ) and bernanke et al. ( 1999 ). some central banks, most notably the bundesbank and the swiss national bank, have pursued monetary targets in the past. however, bernanke et al. ( 1999 ) argue that they were implicitly targeting inflation. while participation in erm i and erm ii have been beneficial to the danish economy in its own right, these exchange - rate systems and the successful introduction of the euro should be viewed in a much broader context than from a purely monetary policy perspective. eu member states co - operate on a large range of political and economic issues and have set up a common legal and institutional framework, of which the ecb is only one example. this probably contributed to a smooth transition to a common monetary policy. the krone vis - a - vis the german mark and the euro chart 1 dkk / dem 3, 0 3, 2 3, 4 3, 6 3, 8 4, 0 4, 2 dkk / dem note : cent ral parit y, dkk / dem from 1 january 1999 a conversion has been made to depict dem instead of eur. the paper is organised as follows. the first

perhaps decline even further. this finding leads to a couple of questions. why is r * declining? and what are the implications? as to the " why ", several global structural factors are driving the decline. one factor is lower structural economic growth. in many advanced economies, we have to get used to structurally lower growth going forward, due to modest productivity growth. another factor relates to the global savings glut. when desired saving exceeds desired investment, the interest rate falls to balance the two. if we take a closer look at who is saving, we see that a large share of global savings is concentrated among the richest households in the u. s., china, and japan. in countries like china, households have increased their demand for financial assets. understandably, the incentive to self - insure has increased, as the chinese have become wealthier and expect to live longer. this incentive is further strengthened by inadequate access to social safety nets. but demographic changes are also boosting savings in european households, as rising life expectancy leads to higher savings for retirement. this means that ageing populations not only challenge pay - as - you - go pension systems – with fewer workers paying for the retirement of larger side 3 af 7 generations. they also present challenges for funded systems by lowering structural interest rates and thus, returns on savings. this leads to my second question – what are the implications of a lower r *? a number of effects are worth considering. the effectiveness of monetary policy to respond to an economic contraction may be hampered. real rates will have to be lower than r * to stimulate the economy. another key implication is that the structural factors holding down r * are neither expected to be short - lived nor to reverse anytime soon. therefore, lower rates are probably here to stay for even longer than justified by the business cycle. low interest rates and low growth present challenges for pensions continued easing of monetary policy and lower structural interest rates will intensify the challenges currently facing institutional investors and the pension system in particular. these challenges are further compounded by the gloomy outlook for growth, as well as demographic developments. for defined contribution schemes, current contribution levels are likely to produce disappointing and inadequate results, all else equal. similarly, the costs of defined benefit guarantees will increase. the lower the rate of interest, the higher the present value of liabilities. this weakens long - term solvency and exacerbates challenges of underfunding. the funding gap is widening and a recent