Fastkurspolitik

Fastkurspolitik refers to a fixed exchange rate policy where a country's currency is pegged to another currency or a basket of currencies. Under this system, the central bank intervenes in the foreign exchange market to maintain the predetermined exchange rate. This involves buying or selling its own currency against the foreign currency to influence supply and demand. The primary goal of a fastkurspolitik is to provide exchange rate stability, which can encourage international trade and investment by reducing currency fluctuation risks. However, maintaining a fixed exchange rate requires the central bank to hold sufficient foreign exchange reserves. If speculative attacks or significant economic imbalances occur, the central bank may struggle to defend the peg. Countries that adopt fastkurspolitik often cede some monetary policy independence, as interest rates may need to be adjusted to support the currency peg rather than to address domestic economic conditions. This policy choice is typically made by countries seeking to anchor inflation expectations or to benefit from the credibility of a stable exchange rate.