All Danmarks Nationalbank´s publications

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The Danish economy is well prepared for a boom

The Danish economy is well prepared for the boom that it is now entering. The economy may continue to expand without any imbalances, but experience also shows that it can overheat suddenly and violently.


Outlook for the Danish economy - Moderate boom in the coming years

The upswing continued in the 2nd half of 2017 and the Danish economy has entered a boom phase with mounting pressures on the labour market. The expansion has been balanced so far, partly supported by previous reforms that have increased the supply of labour. Growth in GDP is forecast at 1.9 per cent this year and slightly less in the next two years. The economy is well prepared for the boom, which may develop without the build-up of imbalances, but experience shows that the economy can overheat suddenly and violently. The government should be prepared to introduce preventive fiscal tightening with a view to dampening growth in demand if there are signs of overheating.


Monetary and financial trends – March 2018

The Danish krone has been stable, on the strong side of the central rate vis-à-vis the euro. Danmarks Nationalbank has not intervened in the foreign exchange market in the past eleven months up to the end of February. Government bond yields in Denmark increased towards the end of 2017 and at the beginning of 2018. Companies and households increased their borrowing at a stable, but subdued, rate.


Annual report 2017

Danmarks Nationalbank's accounts for 2017 show a loss of kr. 254 million, compared with a profit of kr. 3,928 million in 2016. Much of the loss is attributable to the fact that a large part of the foreign exchange reserve earns negative interest.


Working Paper: Corporate debt maturity and investment over the business cycle

In this paper I study the business cycle dynamics of the maturity structure of the debt of U.S. non-financial firms. To account for the documented facts, I construct a quantitative dynamic equilibrium model in which firms optimally choose their debt maturity structure. The model can match stylized facts about the level and dynamics of the maturity structure of debt, both in the aggregate and along the firm size distribution.


Globalisation complicates current account interpretation

The analysis examines how globalisation can affect Denmark's current account. Globalisation implies that goods sold abroad by Danish firms to an increasing extent are completely or partially produced abroad. This complicates the interpretation of the developments in imports, exports, investment income and GDP, because they can be affected by the location of firms' head office and internal accounting structure.


Danish government borrowing and debt 2017

Denmark's central government debt was 21 per cent of GDP at the end of 2017. This is a decrease from 2016, attributable to a government budget surplus. In 2017, on average, the central government issued bonds at a yield to maturity of 0.2 per cent and a maturity of 7.5 years. Interest costs for the central government debt totalled 0.8 per cent of GDP. The yield spread to Germany narrowed, and liquidity improved further in the market for Danish government bonds in 2017, where the central government introduced a new primary dealer model.


Prosperity growth facing demographic headwinds

The analysis contributes to the discussion of how high economic growth rates we can expect to see in the future. The analysis shows that on the domestic front the rising average life expectancy in the coming years will curb prosperity growth. However, this development can be countered by reforms which increase labour supply. We conclude that Denmark is well-prepared for the economic challenges entailed by an ageing population because Denmark has built up considerable net foreign assets and the public finances are sustainable.


Working Paper: Fiscal tools at the zero lower bound

The paper analyses the effectiveness of fiscal tools at the zero lower bound (ZLB) in a non-linear New Keynesian DSGE model. Although the government spending multiplier increases at the ZLB, its size depends strongly on rational expectations to the liquidity trap length. In light of this finding, market expectations in the beginning of 2009 might indicate that expectations to the American Recovery and Reinvestment Act were too optimistic.


Central bank digital currency would not result in better payment solutions

The potential benefits of introducing central bank digital currency in Denmark would not match the considerable challenges resulting from such a decision. Danmarks Nationalbank therefore has no plans to introduce central bank digital currency.


Central bank digital currency in Denmark?

The analysis concludes that central bank digital currency would not be an improvement of the existing payment solutions in Denmark. Central bank digital currency would fundamentally change Danmarks Nationalbank’s role in the financial system and make it a direct competitor to the commercial banks. The introduction would also lead to risks of financial instability. The potential benefits of introducing central bank digital currency for households and businesses in Denmark would not match the considerable challenges which this introduction would present. Danmarks Nationalbank therefore has no plans to issue central bank digital currency.


Working Paper: A cost-benefit analysis of capital requirements for the Danish economy

We analyze the costs and benefits of increasing capital requirements for Danish banks. Costs are low if banks suspend dividend payments for two years and if investors' required return falls as banks accumulate new capital. An increase of required capital ratio from its current level reduces the probability of financial crises and the long-lasting output costs associated with these. Based on Danish data and using models for the Danish economy, we thus confirm findings in studies for other economies: The benefits outweigh the social costs of increasing capital ratios.


Central government borrowing strategy in 2018

The target for sales of domestic government bonds and T-bills in 2018 is kr. 65 billion and kr. 30 billion, respectively. This is unchanged from 2017. In 2018, a new index-linked bond will be opened, maturing in 2030. The focus will be on issuance in the existing 2-year and 10-year nominal bonds and in the new index-linked bond.


New primary dealer model continues in 2018

The central government's primary dealer model with enhanced requirements and payments has strengthened the market for Danish government securities. That is the background for maintaining the model with payments in 2018. The model has contributed to a more liquid market for government securities and hence to lower financing costs for the central government. Liquidity has been increased through narrower bid-ask spreads and a higher number of banks actively trading Danish government securities.


Resolution strategy for SIFI groups

This analysis supports Danmarks Nationalbank's recommendation that the principles for resolution of SIFI groups should be set to resolve the SIFIs as single entities in group strategies. The analysis also examines what the strategy means in relation to the special act on mortgage banks and the setting of requirements for eligible liabilities in the systemically important groups.


The central government will buy the bonds to finance social housing in 2018

When the 2018 Finance Act has been adopted, the central government will buy bonds to finance social housing. The central government expects to purchase bonds for kr. 42.5 billion in 2018. The bond purchases will be financed by issuance of government securities or by drawing on the central government's account. This results in the cheapest possible financing of social housing and the largest saving for the central government.


Danish households opt out of cash payments

Danes prefer digital payment solutions to cash. Digital payment solutions are chosen by the youngest Danes in particular, and many young Danes carry little or no cash. Thus, many Danes live more or less without using cash, and even more Danes are expected to live without using cash in the future. However, Denmark is not heading for a cashless society. Citizens who wish to hold cash will still have the option to do so in the future.


Working Paper: The information content in contingent convertible bond prices

Credit institutions are to an increasing extent using Contingent Convertible Bonds, CoCos, to meet part of their capital requirements. This paper provides a thorough introduction to CoCos – the product, its use in capital regulation, the market and the specific risks faced by investors. A variety of models illustrate how the complexity of CoCos makes them difficult to use when assessing the soundness of the issuer; in addition to this, the many CoCo specific risks make it questionable whether the cost of CoCos constitutes a lower bound for the cost of equity.


Several banks are stepping on the accelerator

The profits of banks and mortgage banks are increasing. This has contributed to a boost in optimism in the financial sector and an increase in the institutions' risk appetite, which is reflected in easing of credit standards. Several credit institutions have increased lending to cyclical industries. The aggregate trend in bank lending in combination with other factors indicates that the risks are building up in the financial system. Danmarks Nationalbank assesses that the conditions for activating the countercyclical capital buffer are in place.


Risks are building up in the financial sector

There is a sentiment of optimism in the financial sector. Profits of the credit institutions are rising, and a considerable lending capacity has been built up. This increases credit institutions’ risk appetite, which is reflected in easing of credit standards. Several credit institutions are increasing lending to cyclical industries and to vulnerable households with high debt ratios. At the same time, rising house prices mean that credit growth may take off suddenly.


A few banks have capital shortfall in severe recession scenario

Danmarks Nationalbank's semiannual stress test of the banking sector shows that the largest banks are close to, and in some cases tap into, their buffer requirements in a severe recession scenario. The stress test focuses on market risk and the losses banks suffer due to falling stock prices, changes in interest rates and increasing credit spreads.


Recommendation for handling failing SIFI groups


Denmark's large surplus is temporary

Denmark has had a current account surplus for almost 27 consecutive years. In recent years, the high current account surplus reflects consolidation among households and firms in the wake of the financial crisis. As concluded by Danmarks Nationalbank in an analysis, a part of the extraordinarily high surplus is assessed to be temporary.


Extraordinarily high current account surplus is temporary

It appears from the analysis that the very high current account surplus is temporary. The surplus has been extraordinarily high since 2010 – also in comparison to the current business cycle. Corporations' net lending rose sharply in the wake of the financial crisis. Today the surplus mainly reflects high household savings. They save in order to reduce their debt. As consumption and investment increase, the current account surplus will be reduced.


Banks from more than 100 countries send payments via Kronos

The analysis describes how banks from all over the world safely and efficiently send Danish krone payments to each other via Danmarks Nationalbank's payment system, Kronos. Most Danish banks have an account at Danmarks Nationalbank and participate directly in Kronos, while many foreign banks participate indirectly through an account holder. It is important that the individual bank considers the risks that both direct and indirect participation entails.


Working Paper: A regional model of the Danish housing market

In this paper, we investigate the geographical connection of the housing market. We estimate a regional model of single-family house prices and show that regions are connected via the relative prices, giving rise to a ripple effect – when house prices increase in one area, part of the housing demand is shifted to other areas. At the same time, we find that house prices are more sensitive to the development of fundamental factors, such as income and interest rates in Copenhagen, and that the ripple effect is stronger from Copenhagen to the rest of Denmark than in the opposite direction.


Working Paper The Global FDI Network: Searching for Ultimate Investors

This paper addresses three types of geographical decoupling in foreign direct investment (FDI), i.e., challenges when using traditional FDI data as a proxy for real economic integration between economies: (i) large bilateral asymmetries between inward and outward FDI, (ii) the role of special purpose entities (SPEs), and (iii) the effect of moving from immediate counterpart economy to ultimate investing economy (UIE). A unique global FDI network is estimated, where SPEs are removed and FDI positions are broken down by the UIE.


Working Paper: The ECB's unconventional monetary policy and the role of exchange rate regimes in cross-country spillovers

We study the impact of the ECB's large scale asset purchase programme on selected euro area and neighbouring countries with a particular focus on the role of the exchange rate regime. The effects of the programme are assessed by conducting an event study as well as by estimating a structural VAR model using a shadow short rate as a measure of the monetary policy stance. We find that the programme has contributed to reducing longer-term bond yields in the euro area as well as in neighbouring countries.


Government bond spread unaffected by ECB QE

The yield spread between Danish and German government bonds has not been affected by the 2015 announcement by the European Central Bank (ECB) that it planned to purchase government bonds in the market, working paper shows.


Diffusion of new knowledge benefits firms' productivity

Productivity growth in the Danish economy since 1995 has been lower than previously. This reflects weak productivity growth in services, while manufacturing has maintained its strong momentum. The decline in productivity growth is an international trend. Growth in aggregate productivity is broad-based in Denmark. It is not only driven by a small group of high-productivity firms. This indicates diffusion of knowledge and technological advances. Productivity levels vary considerably across firms within the same industry.


The Faroese economy – Boom and labour market pressure

The Faroese economy is booming. Unemployment is low, and the construction sector, in particular, is reporting labour shortages. As in earlier boom periods, Faroese fiscal policy seems to be procyclical, with a resultant risk that the economy will overheat. The Faroese government should tighten the fiscal policy, and with the economy in good shape, now is a good time to address the long-term challenges of public finances.


Outlook for the Danish economy – Solid upswing with increased labour market pressure

The ongoing upswing in the Danish economy is solid, and the labour market pressure has increased. Growth in GDP is projected to rise to 2.3 per cent this year from 1.7 per cent last year, and the Danish economy will be in a boom in the coming years. So far, the upswing has been balanced. There is room for higher pressure on the economy during the boom, but overheating may occur suddenly and vigorously. The government should be prepared to initiate a fiscal tightening with a view to dampening growth in demand.


The Danish economy is in a strong upswing

The current upswing in the Danish economy is solid. The growth in GDP is expected to increase to 2.3 per cent in 2017 from 1.7 per cent in 2016. This is an upward adjustment compared with Danmarks Nationalbank's March forecast. So far the recovery during the upswing has been balanced. Although the employment rises rapidly and the pressure on the labour market – especially in the construction sector – intensifies, there is a good chance that the balanced development can continue.


Monetary and financial trends - Stable krone and limited intervention

In the last six months, the Danish krone has been stable slightly on the strong side of the central rate vis-à-vis the euro. In the beginning of this period, Danmarks Nationalbank intervened modestly in the foreign exchange market. Danmarks Nationalbank has kept its monetary policy rates unchanged. Growth in total lending to households and the corporate sector has been moderate. The level of debt is still relatively high.


Once again labour shortage in construction

The share of construction firms reporting labour shortage has almost reached the level in the mid-00s. Experience testifies to labour shortage affecting all types of construction firms when labour market pressures are high. Further stimulation of demand for construction services would not be advantageous in the current cyclical position.


Housing taxation agreement stabilises house prices

The effects on house prices of the Housing Tax Agreement are analyzed. From 2021, housing taxes will again dampen fluctuations in house prices and thus economic cycles in general. Towards 2021, the agreement stimulates real estate prices outside the big cities, while lowering prices, e.g. on apartments in Copenhagen. Finally, it is shown that for most home buyers there is no financial incentive to advance home purchases to before 2021 just to ensure a tax reliefe.


Greenland Challenged Despite Strong Fisheries

Strong economic growth in Greenland in 2016 and 2017 is to a large extent attributable to fisheries. Rising building and construction investments have also boosted growth in Greenland's economy. Despite the good times, the Greenlandic politicians need to address a number of major challenges. It is difficult to combine a sound economy with independence.


Working Paper: A new approach to modelling banks' equity volatility: Adding time-to-maturity jumps

Time-to-maturity is introduced alongside leverage and asset volatility to explain equity volatility. The time-to-maturity can be interpreted as investors' views on when the firm will be liquidated and thereby relates to their view on the funding and solvency situation of the bank. Results for large European banks indicate that changes to the perceived time-to-maturity can indeed partly explain changes in observed equity volatility.


Working Paper: Modelling Fire Sales From Regulatory Cliff Effects

This paper investigates fire sales triggered by regulatory cliff effects induced by the loss of Capital Requirements Regulations (CRR) compliance on covered bonds.


Working Paper: Consumption and savings in a low interest-rate environment

This paper studies consumption and savings decisions of Danish households before and during the financial crisis as well as in the more recent years characterized by negative policy rates.


The Danes' consumption and saving patterns are still affected by the financial crisis

7-8 years after the onset of the financial crisis, it is still affecting the Danes’ consumption and saving patterns. The vast majority of Danish households reduced their consumption immediately after the onset of the financial crisis, but since then diverging patterns have been seen for net savers and net borrowers among the households.


Danish Government Debt Management Policy - Strategy announcement 2nd half of 2017

The target for issuance of domestic government bonds in 2017 is maintained at kr. 65 billion in order to increase the outstanding volume of new bonds and ensure continuity in issuance policy. The target for T-bills at year-end is also maintained unchanged at kr. 30 billion.


Working Paper: Financial Cycles: What are they and what do they look like in Denmark?

In this paper we study what financial cycles are, what they look like in Denmark, and what their relationship is with the real economy. We show that medium term swings in house prices and credit should be used as an illustration of the financial cycle in Denmark.


Optimism in the banking sector provides breeding ground for increased risk-taking

Danmarks Nationalbank's semiannual analysis of financial stability shows that the largest banking groups achieved their best ever overall performance in 2016 and the banks' financial statements for the 1st quarter of 2017 also recorded sound profits. The banks' earnings are underpinned by temporary effects from very low loan impairment charges. The economic upswing, rising house prices and the continued low level of interest rates may lead to a general perception of low credit risk. This may intensify the pressure on the banks' credit standards. The large banks comply with the current capital requirements, but their capital base is lower than that of other Nordic banks. Results from Danmarks Nationalbank's accounts-based stress test show that, in a severe recession scenario, few of the systemic banks will have a small capital shortfall relative to the buffer requirements.


Good times in the banking sector but risk of speed blindness

Bank earnings are record high. In some areas, current developments are similar to developments in the period up to the financial crisis. Large Danish banks have a lower capital base than that of other Nordic banks.


Largest banks close to buffer requirements in stress test

Danmarks Nationalbank's semiannual stress test of the Danish banking sector shows that the largest banks generally have capital in excess of the regulatory requirements in a severe recession scenario. However, some banks are close to drawing on their capital buffers, and a few tap into their buffers.


Banks' capital accumulation does not hurt GDP growth

The capital ratios of Danish banks have increased in the years following the financial crisis. There are no adverse effects on GDP growth of banks' capital accumulation. This is the conclusion of Danmarks Nationalbank's analysis of banks' capital accumulation and GDP growth.


New Model has improved Liquidity in the Danish Government Securities Market

New primary dealer model is off to a good start with an improvement in liquidity. Price transparency has improved with narrower bid-ask spreads and increasing turnover in the interdealer market. All 11 primary dealers in Danish government bonds have quoted substantially tighter prices and the turnover is to a lesser degree than before concentrated on a few banks.


Oversight of the financial infrastructure

In this report, Danmarks Nationalbank presents the conclusions from its oversight of the Danish core payment and settlement systems as well as the most important payment instruments in 2016. Danmarks Nationalbank finds that the operational stability of the core systems and instruments has been satisfactory, and generally there has been ample liquidity in the systems for the settlement of payments. Danmarks Nationalbank has requested analyses whether the systems subject to oversight comply with the CPMI-IOSCO guidance on cyber resilience for financial market infrastructures. In addition, Danmarks Nationalbank’s oversight has focused on the management of risks arising from interdependencies between the payments infrastructure systems.


Dankort Assessment

Danmarks Nationalbank has assessed Dankort, which is owned by Nets A/S, against the standards for card payment schemes established by the European Central Bank, ECB. Dankort's performance is stable with a high degree of availability, and Dankort fraud is low by international comparison. Danmarks Nationalbank's assessment contains recommendations to Nets A/S about, inter alia, more systematic knowledge management in relation to Dankort. Other recommendations concern expansion of Dankort-related risk analyses and strengthening the framework for decision-making and communication. Danmarks Nationalbank oversees the payment and settlement systems in Denmark in order to promote safe and efficient settlement of payments, securities trades, etc. Dankort is one of the solutions subject to this oversight.


Denmark contributes to a strong IMF

The main objective of the International Monetary Fund, IMF, is to promote global economic and financial stability. A well-functioning IMF with sufficient funding is a prerequisite for solving this task. A strong IMF is a matter of Danish interest, as Denmark is a small, open economy and therefore highly dependent on and exposed to external conditions. Over the last decade Denmark, via Danmarks Nationalbank, has increased its total commitments to the IMF. Risks associated with loans to the IMF are extremely low due the high creditworthiness of the IMF.


Working Paper: A Leading Indicator of House-Price Bubbles

The emergence of a house-price bubble can have sizeable implications for macroeconomic as well as financial stability. This paper investigates the dynamics of house prices in Denmark in order to identify emerging bubbles in due time. The empirical results identify developments in line with a price bubble from mid-2005 in Denmark. When applied to flats in Copenhagen, real price developments in 2015-16 indicate speculative behaviour but it cannot be ruled out that developments are driven by fundamental economic factors.


China’s significance for Danish exports continues to grow

Danish exports to China are playing an ever increasing role. Accounting for just under 6 per cent of final demand for Danish exports, China is approaching the UK, Denmark’s fourth largest export market.


Danes are Front-Runners in Electronic Payments

Danes prefer electronic payments, especially payment cards. In fact they use cards more than any other EU citizens. The electronic payments are supported by the payments systems which ensure that the payments are settled quickly and smoothly. E.g. it is possible to transfer funds in seconds. Denmark is a digital front-runner according to the European Commission's index. This is among other factors attributable to the targeted public-sector focus on digitisation.


Working Paper: What are the effects of changes in taxation and new types of mortgages on the real economy? - The case of Denmark during the 00's

What are the effects of introducing interest-only, flexible-rate mortgage contracts and a tax-freeze on housing wealth for the real- and financial economy? I study this within a medium-size DSGE-model with housing, banking and financial frictions, and the coexistence of flexible, fixed rate and interest-only mortgage contracts. I find that the introduction and the adaptation of flexible rate and interest-only mortgage contracts together with a freeze of taxation of the housing wealth can explain around 1/3 of the real house price gap in Denmark during the period 2004-06 and 15-40 per cent of the output gap. The household debt-to-GDP would have been almost constant instead of increasing by 20 percentage points. Finally, the analysis points to a more volatile economy after the implementation of the structural changes to the economy.

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