Negative nominal policy rates change the incentive structure for holding cash and can prompt higher currency hoarding, but the magnitude depends on technical, cultural, and policy factors. Cash provides a zero nominal return that becomes relatively attractive when bank deposits are charged; yet physical storage, insurance and the legal status of notes limit how far hoarding can go. Research and public commentary by Kenneth Rogoff Harvard University emphasize that widespread physical cash creates a practical barrier to deep negative rates because individuals and firms can switch into notes to avoid charges. This tension shapes central-bank choices and public debate.
Mechanism linking negative rates and hoarding
When central banks set negative interest rates, commercial banks may pass those rates to depositors or absorb them in net interest margins. Faced with explicit charges, some households and businesses may prefer to hold cash, converting electronic balances into notes. Claudio Borio Bank for International Settlements has highlighted that this substitution is constrained by transaction convenience and storage costs, and by the fact that holding large volumes of notes is costly and visible. Technology and payment habits matter: economies with strong digital payment networks will see less physical substitution than cash-dominant societies.
Socioeconomic and territorial consequences
Increased currency hoarding can reduce the effectiveness of monetary policy by lowering bank deposits and shrinking credit supply, harming intermediation. Benoît Cœuré European Central Bank has observed that the distributional effects vary across regions: older populations and areas with low banking access are more likely to resort to cash. Cross-border flows also complicate the picture; high-denomination notes can be transported across borders, affecting neighboring jurisdictions and enabling tax evasion or illicit finance if regulation is weak. There are environmental and logistical consequences as well, because producing, transporting and securing larger volumes of notes raises carbon and resource costs compared with digital alternatives.
Policymakers face trade-offs: measures such as restricting large-denomination notes or introducing tiered reserve remuneration alter incentives but raise legal, privacy and logistical concerns. Cultural attitudes toward cash and the existing payment infrastructure will determine how strong the hoarding response is, so empirical outcomes differ across countries. Overall, negative rates can increase currency hoarding but do not guarantee it; the scale and harms depend on specific institutional choices, societal preferences and the availability of feasible policy tools.