In modern macroeconomics, central banks employ various monetary policy instruments to achieve price stability and support sustainable economic growth. During periods of low inflation or deflationary pressure, conventional monetary policies—such as cutting nominal interest rates toward zero—may prove insufficient. To provide further stimulus, several central banks, including the Swiss National Bank (SNB), have historically implemented a Negative Interest Rate Policy (NIRP).
The effectiveness of these demand-side policies is often amplified by the national multiplier effect. For instance, in Switzerland, it has been estimated that an initial government-backed green infrastructure investment of 500 million Swiss Francs (CHF) would eventually lead to a cumulative increase in national output of 800 million CHF.
Under a negative interest rate regime, commercial banks are charged a fee for holding excess reserves at the central bank. The intention is to incentivize these commercial institutions to increase lending to businesses and households rather than hoarding liquidity. If these negative rates are passed down to retail depositors, it penalizes saving and lowers the cost of borrowing, boosting consumption CCC and investment III. Additionally, negative rates can cause capital outflows as investors seek higher yields elsewhere, leading to a depreciation of the domestic currency which can improve net exports X−MX-MX−M.
However, the efficacy of NIRP is heavily constrained by the physical existence of cash. When physical currency is readily available, households and commercial entities can bypass negative rates on bank deposits by withdrawing their funds and holding physical banknotes. This is particularly relevant in Switzerland, where high-denomination bank notes (specifically the 1000 CHF note) are widely circulated and used as a store of value. Fig. 1 shows the value of Swiss banknotes in circulation over a five-year period.
| Year | 10 CHF | 50 CHF | 100 CHF | 1000 CHF | Total |
|---|---|---|---|---|---|
| 2018 | 2.5 | 3.2 | 9.4 | 48.4 | 63.5 |
| 2019 | 2.6 | 3.1 | 9.8 | 49.1 | 64.6 |
| 2020 | 2.7 | 3.3 | 10.5 | 51.2 | 67.7 |
| 2021 | 2.8 | 3.4 | 11.1 | 53.5 | 70.8 |
| 2022 | 2.6 | 3.2 | 10.6 | 47.9 | 64.3 |
Fig. 1 Value of Swiss banknotes in circulation (billion CHF) 2018–2022
Furthermore, critics argue that negative rates damage the profitability of commercial banks by squeezing their net interest margins, as banks are often hesitant to pass negative rates onto small retail depositors for fear of triggering a run on deposits. This could paradoxically lead to a contraction in credit supply. Additionally, negative rates can create distortions in asset markets, driving up real estate prices and penalizing cautious savers who rely on fixed-income yields.
Fig. 2 Swiss National Bank (SNB) policy interest rate (%) 2012–2022
| Date | Policy Rate (%) |
|---|---|
| 2012-01-01 | 0.00 |
| 2013-01-01 | 0.00 |
| 2014-01-01 | 0.00 |
| 2015-01-15 | -0.75 |
| 2017-01-01 | -0.75 |
| 2019-01-01 | -0.75 |
| 2021-01-01 | -0.75 |
| 2022-09-22 | 0.50 |
Fig. 3 Swiss National Bank policy rate data
Using information from the stimulus material, evaluate whether a negative interest rate policy would help a central bank or government achieve its macroeconomic objectives.
