Negative interest rates and the demand for cash

Abstract

Switzerland, Denmark, Sweden and the euro countries of Europe have all imposed small negative interest rates on deposits commercial banks place with their central bank. These costs may be passed on to their depositors in the form of a fee on deposit balances. The fear is that higher negative interest rates will provide an incentive for banks and depositors to increase their demand for cash. If this occurs, banks may hoard cash and depositors may substitute cash for card transactions. A number of solutions have been proposed but have administrative and political drawbacks. Current operating procedures offer a less disruptive approach.