Currency Demand at Negative Policy Rates

Abstract

Following the implementation of negative policy rates, interest rates on bank deposits reached their historic lows, with values close or equal to zero. This paper investigates the implications of such a new environment for the demand of currency. We find evidence of a structural break in the demand of currency when rates on deposits fall below 0.1 per cent. Exploiting time, bank and banknote denomination variation, as well as exogenous reforms that affected currency payments and holdings, our analysis finds that the increase of currency in circulation seems to be mostly driven by transactions instead of store-of-value demand.

Keywords: financial stability, monetary policy, negative interest rates, deposits, zero lower bound, money demand

JEL Classification: E41, E42, E52, E58