Despite the unusual volume of intervention, Danmarks Nationalbank has applied a wellknown reaction function by first intervening in the foreign exchange market and then adjusting interest rates in response to the capital inflows. It has been important for us to stick to this reaction function, one reason being that in a normal situation it is the banks that carry out “stabilising speculation”.
When kroner are inexpensive, the banks build up stocks of kroner, and when kroner are ex- pensive they do the opposite – they sell kroner and purchase foreign exchange. BIS central bankers’ speeches  1  When the situation is not normal, the banks’ position is typically around zero, and Danmarks Nationalbank absorbs the net shocks in the foreign exchange market.