<p>Pretty much yes. It is because cash carries implicit zero interest in itself. In practice interest rates can be little bit negative because having all your money in form of cash could be dangerous (you might get robbed, also it’s not easy to store let’s say 20000e at home etc.). </p>

<p>However, if a country would went cashless the central bank could in principle set interest rate to any value they would like even -10%. In that case there is really no any other way how people could avoid the negative interest rate if they want to hold the money.</p>

CC BY-SA 4.0
2020-01-19T19:46:00.453Z
@BBKing This answer contradicts yours. Where does it go wrong?
Giskard
CC BY-SA 4.0
2020-01-20T02:34:55.517Z
In a cashless economy there would be possible to invest into cryptocurrencies. I would imagine that hoarding, say, Bitcoins, would become popular if banks set up high negative interest rates.
KarmaPeasant
CC BY-SA 4.0
2020-01-20T08:38:45.213Z
@user161005 not sure if people would hoard crypto -research shows that crypto behaves like a speculative asset not as a currency-  but people would probably started “hoarding” more regular assets which is the whole point of negative intrastate rates, to get rid of the excess uninvested savings. But the negative interest rates can be very low if society is cashless - it’s also not possible that the society completely switches to some another form of money if the original money is legal tender so all taxes have to be paid with it which is what creates demand for fiat money in the first place.
1muflon1
CC BY-SA 4.0
2020-01-20T11:54:12.817Z
@1muflon1 1. But does it mean that a cryptocurrency is UNABLE to behave as a currency? Today cryptocurrencies kind of stuck due to network effect , there is not much use in using them, but to speculate. Situation that you described would simulate adoption of cryptocurrencies on wider scale, making speculation lesser part of their circulation. 2. Okay, so there would be two currencies, one used for taxes and one for everything else. I don't see how such incomplete adoption would make much difference.
KarmaPeasant
CC BY-SA 4.0
2020-01-20T12:11:24.057Z
@user161005 1. No it doesn’t in fact cashless money is for all practical purposes also crypto - I just did not call it that way since that’s name usually reserved for some private currency. 2. The problem is that since you still need the original currency for taxes it’s not that useful to use the 2nd currency (you could make the same story for commodity money no crypto required). This is because businesses still need to collect VAT, payroll taxes etc. Also with negative interest rates if you spend your money you are fine (i.e. having no deposits). Hence there is no point in using crypto for...
1muflon1
CC BY-SA 4.0
2020-01-20T12:11:42.650Z
...purchases. You could use crypto as an asset to avoid the negative interest that would not apply to your crypto wallet since it’s different currency but then crypto is extremely volatile and speculative, hence my best prediction is people would put money into different assets. We could debate that but it’s not even important to the answer. Point is that existence of some investment assets does not mean negative interest rates would mean that money would be “crowded out” of economy and negative interest rates could be sustained if they are negative because the real interest rate is also neg
1muflon1
CC BY-SA 4.0
2020-01-20T12:41:41.337Z
@1muflon1 1."still need the original currency for taxes it’s not that useful to use the 2nd currency" I don't see why need to pay taxes makes 2nd currency impractical. Nothing prevents a company from converting small percentage of its 2nd currency into tax-currency. 2."if you spend your money you are fine". Liquidity of commodities won't beat liquidity of money. If I want liquidity I will prefer money to money. 3."but then crypto is extremely volatile". Supply of crypto can't be increased at will, which makes its exchange rate rise in long-term if it's not losing popularity.
KarmaPeasant
CC BY-SA 4.0
2020-01-20T12:58:28.687Z
@user161005 1. For this purpose you can use any foreign currency even in the original example. But that carries with itself host of problems first you are increasing your uncertainty because now every transaction carries exchange rate risk. 2. What do you think exchange rate is based on? It includes nominal interest rates and other fundamentals. In perfect market exchange rate would always adjust in a way that arbitrage is impossible - sure real world is not perfect, but exchange rate still more or less adjust to prevent arbitrage. 3. It’s just factual empirical observation crypto is quite...
1muflon1
CC BY-SA 4.0
2020-01-20T13:02:53.167Z
volatile. Also it’s not even true supply can’t be increased. Not all crypto works like bitcoin and even in bitcoin there is upper limit but the supply still can grow. Demand is additional problem with crypto.. since there is no underlaying intristic value in it you can’t be confident demand will always increase. Even if the value of crypto would empirically just always increase because demand always would it would just solidify bitcoin as investment asset - deflation is also form of price instability and high deflation gives incentive to people to not use the money as money but as investment
1muflon1
CC BY-SA 4.0
2020-01-20T23:06:15.537Z
Thanks for a fruitful discussion. I'm I right that foreign currencies can not be used as a substitute since difference in interest rates will lead to divergent exchange rates (in addition to normal exchange rate risk)?
JonT
CC BY-SA 4.0
2020-01-20T23:14:45.953Z
@JonT pretty much yes. They could be used as forex ‘investments’ but they would not be really useful for purposes of paying taxes/debts that are in the local currency. Unless economic activity would shifted into informal sector it would not ‘crowd out’ the local money. At least not under the floating exchange rate regime
1muflon1
CC BY-SA 4.0
2020-01-19T18:49:37.930Z
2020-01-19T18:49:37.930Z
1muflon1
<p>Since this is a question about central banks... they would not want to do this because it would push many ordinary people to put their savings in highly speculative assets, potentially destabilizing the economy. It is/was <a href="https://www.nytimes.com/2013/02/08/business/fed-official-sees-tension-in-some-credit-markets.html" rel="nofollow noreferrer">already</a> a bit of a concern even with near zero, never mind mildly negative interest rates. There's a fine line between "kickstarting the economy" and setting up a large portion of the population to speculate in the junk bond market and/or housing.</p>

<p>Also, wealth inequality will probably go up faster as well (in the long) as more smaller investors get wiped out, although that's seldom a concern for central banks, given their usual mission.</p>

<p>As for hoarding cash in such an environment... that's not without risk either, because the authorities could decide to counter that with some kind of demonetization (see <a href="https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation" rel="nofollow noreferrer">India</a>, and numerous other historical examples.)</p>

<p>Also, in a democracy, weird stuff might happen, like the Swiss left- and right-wing populist parties <a href="https://finance.yahoo.com/news/swiss-national-bank-under-rising-091620680.html" rel="nofollow noreferrer">threatening</a> to put to a referendum a redistribution of the central bank profits into the pension funds (who blame the central bank for their losses.) That would basically negate the effect of the negative interest rates, as far as the pensions funds are concerned. In fact, it would act like a redistribution from others to said pension funds, ultimately.</p>

CC BY-SA 4.0
2020-01-20T11:28:06.517Z
2020-01-20T13:16:29.913Z
2020-01-20T13:16:29.913Z
fantastic peace and prosperity
<p>What stops it are the basic laws of supply and demand.</p>

<p>A highly negative interest rate means that someone will pay you to take their money. There are very few people willing to offer credit on those terms.</p>

<p>This is the equivalent of me offering someone 100 dollars today and asking for 90 dollars in return tomorrow, with the added risk of not receiving all of the money back. There is nothing in it for me.</p>

<p>Central banks would in that case would be giving free money to private banks, which certainly would not pass on negative interest rates to borrowers, for reasons outlined above.</p>

CC BY-SA 4.0
2020-01-19T19:45:53.780Z
@1muflon1 This answer contradicts yours. Where does it go wrong?
Giskard
CC BY-SA 4.0
2020-01-19T19:54:56.827Z
@Giskard I am not even 100% sure it contradicts mine. I would agree that under negative rates supply of credit will drop - that’s even the main point usually neg interest rates occur when real Int is neg. which indicates excess of saving and credit. If BBking answer is made under assumption there is cash I would not call it wrong but in cashless society there would still be credit. This is because it’s better to borrow 100 today for 90 tomorrow then having 100 today on deposit account and get 80 tomorrow due to negative interest on deposit - hence there could still be incentive to borrow
1muflon1
CC BY-SA 4.0
2020-01-19T23:20:03.280Z
By the way I just realized I should have said lend in my comment instead of borrow... Sorry for the typo
1muflon1
CC BY-SA 4.0
2020-01-19T23:27:13.347Z
You are right that this is the reason why interest rates normally have been positive (up until now). However, for instance in fast declining populations you might envision a lot of people want to offer credit despite highly negative rates if there are no better alternatives to save.
JonT
CC BY-SA 4.0
2020-01-19T23:32:21.563Z
It was in these types of situations I intended the question for. I have tried to improve the question to better reflect that. Thanks for your answer anyway.
JonT
CC BY-SA 4.0
2020-01-20T00:17:56.523Z
@JonT, sure people may be willing to accept negative interest rates. I just don't think it is realistic that it will ever happen. Realistically, the worst way to save will remain to keep your money in your bank account at 0% interest, which will always be better than negative interest. Declining populations will not change that.
BB King
CC BY-SA 4.0
2020-01-20T08:44:27.617Z
@BBKing but at negative interest rates in cashless society also deposit interest rates would be negative! In fact even in Netherlands at some banks the interest rate on some deposit account (above 1000000e) the interest rate is already negative and we are not even completely cashless (which why banks applied it to only accounts with over 1000000e because where will you take that heap of cash?). If there is negative interest on your deposit account you still want to invest in bonds etc which at least offer less negative interest than deposit - it’s like a mirror image of normal situations
1muflon1
CC BY-SA 4.0
2020-01-21T23:45:25.520Z
Yes, but very large negative interests (not minor ones as the OP suggests) would eventually imply negative borrowing rates, which could lead to almost infinite demand for loans in a market that could not clear. Especially with the competition we see in banking today, I simply don't see highly negative deposit rates and interest rates as realistic. In a cashless society there are also no costs to storing cash (which could be a rationale for negative deposit rates).
BB King
CC BY-SA 4.0
2020-01-19T18:51:34.100Z
2020-01-19T18:51:34.100Z
BB King
<p>What limits central banks from setting highly negative interest rates if needed? Is it only that people can take out a lot of cash and put it in a vault, or are there other reasons?</p>

<p>If we had removed cash and only had electronic money, could central banks set interest rates highly negative, for instance, -10%? Could they set it to -20%? Or would people just have started to use other means of value, like foreign currencies, crypto currencies or gold?</p>

CC BY-SA 4.0
2020-01-20T01:31:35.003Z
Does this answer your question? [Cash and negative interest rates](https://economics.stackexchange.com/questions/33406/cash-and-negative-interest-rates)
Art
CC BY-SA 4.0
2020-01-20T21:38:21.893Z
Not the same question, but it sort of answers my question. Thanks. The questions link to an IMF blog article which says that the lower bond on interest rates can be solved by removing cash or splitting electronic money and normal cash into two currencies and let the hard currency float. So I guess that implies that IMF think that the main constraint for negative rates are hard cash.
JonT
CC BY-SA 4.0
2020-01-20T22:36:31.080Z
However, it does not tell if there are other lower bonds if the interest rates is pressed even more negative for instance if and when people would start to use money equivalents like foreign currencies, crypto currencies or gold.
JonT
<monetary-policy><interest-rate>
What limits central banks from setting highly negative interest rates?
JonT
# What limits central banks from setting highly negative interest rates?

(Asked by: username_0 on 2020-01-19)

What limits central banks from setting highly negative interest rates if needed? Is it only that people can take out a lot of cash and put it in a vault, or are there other reasons?

If we had removed cash and only had electronic money, could central banks set interest rates highly negative, for instance, -10%? Could they set it to -20%? Or would people just have started to use other means of value, like foreign currencies, crypto currencies or gold?

**Tags:** monetary-policy, interest-rate

> **Comments:**
> **username_1**: Does this answer your question? [Cash and negative interest rates](https://economics.stackexchange.com/questions/33406/cash-and-negative-interest-rates)  
> **username_0**: Not the same question, but it sort of answers my question. Thanks. The questions link to an IMF blog article which says that the lower bond on interest rates can be solved by removing cash or splitting electronic money and normal cash into two currencies and let the hard currency float. So I guess that implies that IMF think that the main constraint for negative rates are hard cash.  
> **username_0**: However, it does not tell if there are other lower bonds if the interest rates is pressed even more negative for instance if and when people would start to use money equivalents like foreign currencies, crypto currencies or gold.  

---

## 3 answers

### Answer by username_2 on 2020-01-19. Score: 0 | Accepted answer

Pretty much yes. It is because cash carries implicit zero interest in itself. In practice interest rates can be little bit negative because having all your money in form of cash could be dangerous (you might get robbed, also it’s not easy to store let’s say 20000e at home etc.).

However, if a country would went cashless the central bank could in principle set interest rate to any value they would like even -10%. In that case there is really no any other way how people could avoid the negative interest rate if they want to hold the money.

> **Comments:**
> **username_3**: @username_6 This answer contradicts yours. Where does it go wrong?  
> **username_4**: In a cashless economy there would be possible to invest into cryptocurrencies. I would imagine that hoarding, say, Bitcoins, would become popular if banks set up high negative interest rates.  
> **username_2**: @user161005 not sure if people would hoard crypto -research shows that crypto behaves like a speculative asset not as a currency-  but people would probably started “hoarding” more regular assets which is the whole point of negative intrastate rates, to get rid of the excess uninvested savings. But the negative interest rates can be very low if society is cashless - it’s also not possible that the society completely switches to some another form of money if the original money is legal tender so all taxes have to be paid with it which is what creates demand for fiat money in the first place.  
> **username_4**: @username_2 1. But does it mean that a cryptocurrency is UNABLE to behave as a currency? Today cryptocurrencies kind of stuck due to network effect , there is not much use in using them, but to speculate. Situation that you described would simulate adoption of cryptocurrencies on wider scale, making speculation lesser part of their circulation. 2. Okay, so there would be two currencies, one used for taxes and one for everything else. I don't see how such incomplete adoption would make much difference.  
> **username_2**: @user161005 1. No it doesn’t in fact cashless money is for all practical purposes also crypto - I just did not call it that way since that’s name usually reserved for some private currency. 2. The problem is that since you still need the original currency for taxes it’s not that useful to use the 2nd currency (you could make the same story for commodity money no crypto required). This is because businesses still need to collect VAT, payroll taxes etc. Also with negative interest rates if you spend your money you are fine (i.e. having no deposits). Hence there is no point in using crypto for...  
> **username_2**: ...purchases. You could use crypto as an asset to avoid the negative interest that would not apply to your crypto wallet since it’s different currency but then crypto is extremely volatile and speculative, hence my best prediction is people would put money into different assets. We could debate that but it’s not even important to the answer. Point is that existence of some investment assets does not mean negative interest rates would mean that money would be “crowded out” of economy and negative interest rates could be sustained if they are negative because the real interest rate is also neg  
> **username_4**: @username_2 1."still need the original currency for taxes it’s not that useful to use the 2nd currency" I don't see why need to pay taxes makes 2nd currency impractical. Nothing prevents a company from converting small percentage of its 2nd currency into tax-currency. 2."if you spend your money you are fine". Liquidity of commodities won't beat liquidity of money. If I want liquidity I will prefer money to money. 3."but then crypto is extremely volatile". Supply of crypto can't be increased at will, which makes its exchange rate rise in long-term if it's not losing popularity.  
> **username_2**: @user161005 1. For this purpose you can use any foreign currency even in the original example. But that carries with itself host of problems first you are increasing your uncertainty because now every transaction carries exchange rate risk. 2. What do you think exchange rate is based on? It includes nominal interest rates and other fundamentals. In perfect market exchange rate would always adjust in a way that arbitrage is impossible - sure real world is not perfect, but exchange rate still more or less adjust to prevent arbitrage. 3. It’s just factual empirical observation crypto is quite...  
> **username_2**: volatile. Also it’s not even true supply can’t be increased. Not all crypto works like bitcoin and even in bitcoin there is upper limit but the supply still can grow. Demand is additional problem with crypto.. since there is no underlaying intristic value in it you can’t be confident demand will always increase. Even if the value of crypto would empirically just always increase because demand always would it would just solidify bitcoin as investment asset - deflation is also form of price instability and high deflation gives incentive to people to not use the money as money but as investment  
> **username_0**: Thanks for a fruitful discussion. I'm I right that foreign currencies can not be used as a substitute since difference in interest rates will lead to divergent exchange rates (in addition to normal exchange rate risk)?  
> **username_2**: @username_0 pretty much yes. They could be used as forex ‘investments’ but they would not be really useful for purposes of paying taxes/debts that are in the local currency. Unless economic activity would shifted into informal sector it would not ‘crowd out’ the local money. At least not under the floating exchange rate regime  

---

### Answer by username_5 on 2020-01-20. Score: 1

Since this is a question about central banks... they would not want to do this because it would push many ordinary people to put their savings in highly speculative assets, potentially destabilizing the economy. It is/was [already](https://www.nytimes.com/2013/02/08/business/fed-official-sees-tension-in-some-credit-markets.html) a bit of a concern even with near zero, never mind mildly negative interest rates. There's a fine line between "kickstarting the economy" and setting up a large portion of the population to speculate in the junk bond market and/or housing.

Also, wealth inequality will probably go up faster as well (in the long) as more smaller investors get wiped out, although that's seldom a concern for central banks, given their usual mission.

As for hoarding cash in such an environment... that's not without risk either, because the authorities could decide to counter that with some kind of demonetization (see [India](https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation), and numerous other historical examples.)

Also, in a democracy, weird stuff might happen, like the Swiss left- and right-wing populist parties [threatening](https://finance.yahoo.com/news/swiss-national-bank-under-rising-091620680.html) to put to a referendum a redistribution of the central bank profits into the pension funds (who blame the central bank for their losses.) That would basically negate the effect of the negative interest rates, as far as the pensions funds are concerned. In fact, it would act like a redistribution from others to said pension funds, ultimately.


---

### Answer by username_6 on 2020-01-19. Score: 0

What stops it are the basic laws of supply and demand.

A highly negative interest rate means that someone will pay you to take their money. There are very few people willing to offer credit on those terms.

This is the equivalent of me offering someone 100 dollars today and asking for 90 dollars in return tomorrow, with the added risk of not receiving all of the money back. There is nothing in it for me.

Central banks would in that case would be giving free money to private banks, which certainly would not pass on negative interest rates to borrowers, for reasons outlined above.

> **Comments:**
> **username_3**: @username_2 This answer contradicts yours. Where does it go wrong?  
> **username_2**: @username_3 I am not even 100% sure it contradicts mine. I would agree that under negative rates supply of credit will drop - that’s even the main point usually neg interest rates occur when real Int is neg. which indicates excess of saving and credit. If BBking answer is made under assumption there is cash I would not call it wrong but in cashless society there would still be credit. This is because it’s better to borrow 100 today for 90 tomorrow then having 100 today on deposit account and get 80 tomorrow due to negative interest on deposit - hence there could still be incentive to borrow  
> **username_2**: By the way I just realized I should have said lend in my comment instead of borrow... Sorry for the typo  
> **username_0**: You are right that this is the reason why interest rates normally have been positive (up until now). However, for instance in fast declining populations you might envision a lot of people want to offer credit despite highly negative rates if there are no better alternatives to save.  
> **username_0**: It was in these types of situations I intended the question for. I have tried to improve the question to better reflect that. Thanks for your answer anyway.  
> **username_6**: @username_0, sure people may be willing to accept negative interest rates. I just don't think it is realistic that it will ever happen. Realistically, the worst way to save will remain to keep your money in your bank account at 0% interest, which will always be better than negative interest. Declining populations will not change that.  
> **username_2**: @username_6 but at negative interest rates in cashless society also deposit interest rates would be negative! In fact even in Netherlands at some banks the interest rate on some deposit account (above 1000000e) the interest rate is already negative and we are not even completely cashless (which why banks applied it to only accounts with over 1000000e because where will you take that heap of cash?). If there is negative interest on your deposit account you still want to invest in bonds etc which at least offer less negative interest than deposit - it’s like a mirror image of normal situations  
> **username_6**: Yes, but very large negative interests (not minor ones as the OP suggests) would eventually imply negative borrowing rates, which could lead to almost infinite demand for loans in a market that could not clear. Especially with the competition we see in banking today, I simply don't see highly negative deposit rates and interest rates as realistic. In a cashless society there are also no costs to storing cash (which could be a rationale for negative deposit rates).  

---

