In recent years, structural changes in payment technology have significantly shifted how households spend and transact. The level of consumer spending is shaped by several macroeconomic drivers, including changes in disposable income, taxation, and consumer sentiment. During periods of economic expansion, consumer confidence often spurs an expenditure-led boom. Conversely, during contractions, aggregate demand can fall sharply. Fig. 1 illustrates how household consumer expenditure reacts to changes in national disposable income.
Fig. 1 The relationship between household disposable income and consumer expenditure
Changes in injections and leakages affect the macroeconomic equilibrium. It has been estimated that an initial injection of 500 million Danish Kroner (DKK) of government capital investment into the Danish economy would lead to an eventual cumulative increase in real GDP of 800 million DKK.
At the same time, the transactional use of physical banknotes has dropped sharply in Denmark. In 2012, approximately 55% of retail transactions were conducted using physical cash. By 2020, this figure had fallen to 15%, and it is projected to drop below 3% by 2028. This rapid transition directly affects currency management, reducing the quantity and value of banknotes kept in circulation by the central bank. Fig. 2 shows the total value of Danish banknotes in circulation over a five-year period.
| Year | 50 kr | 100 kr | 200 kr | 500 kr | Total |
|---|---|---|---|---|---|
| 2018 | 2.5 | 5.2 | 15.4 | 38.9 | 62.0 |
| 2019 | 2.2 | 4.8 | 14.1 | 35.6 | 56.7 |
| 2020 | 1.9 | 4.3 | 12.8 | 32.2 | 51.2 |
| 2021 | 1.6 | 3.8 | 11.5 | 29.1 | 46.0 |
| 2022 | 1.3 | 3.2 | 10.1 | 25.8 | 40.4 |
Fig. 2 Value of banknotes in circulation (billion DKK) 2018–2022
Monetary policymakers point out that a fully digital currency and a cashless economy can enhance the effectiveness of monetary policy. A key argument is the removal of the 'zero lower bound' (ZLB) on nominal interest rates. This allows central banks to set deeply negative policy rates during severe demand-side shocks. When physical cash is readily available, households and firms can easily bypass negative rates by hoarding banknotes outside of commercial bank accounts. This hoarding limits the ability of negative interest rates to stimulate aggregate demand.
Negative interest rates mean that commercial financial institutions are charged a fee for holding excess reserves at the central bank. To avoid these fees, commercial banks are incentivised to expand credit and increase lending to the private sector. If banks pass these negative rates on to depositors, savers are penalised, making borrowing highly attractive. Consequently, negative rates alter exchange rates, domestic credit growth, and national debt service costs.
To combat persistent deflationary traps and kickstart growth, several major central banks—such as Danmarks Nationalbank, the Swiss National Bank, the Bank of Japan, and the European Central Bank—have operated with negative policy rates. However, critics highlight negative side effects, including compressed commercial bank interest margins, decreased consumer confidence, and the penalisation of cautious savers.
| Date | Policy Rate (%) |
|---|---|
| 2013-01-01 | 1.50 |
| 2014-01-01 | 0.50 |
| 2015-01-01 | 0.10 |
| 2016-01-01 | -0.65 |
| 2017-01-01 | -0.65 |
| 2019-01-01 | -0.65 |
| 2021-01-01 | -0.50 |
| 2022-01-01 | -0.10 |
Fig. 3 Danmarks Nationalbank policy rate (%) 2013–2022
While monetary authorities assess central bank digital currencies (CBDCs), transitioning to a completely cashless economy raises significant distributional concerns. Digital-only payment systems risk marginalising vulnerable groups, including the unbanked, the elderly, and rural low-income households. Moreover, structural unemployment remains a major challenge during economic transitions. The success of monetary policy in addressing such structural unemployment depends on labour market flexibility, wage adjustments, and the availability of retraining schemes.
Using information from the stimulus material, evaluate whether a negative interest rate would help a government achieve its macroeconomic objectives.
