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