to reduce perceived adverse effects on households. there is some anecdotal evidence that people in switzerland, for example, on balance are not in favor of negative rates. 12 but businesses and households may feel that they have been treated unfairly as they see others take advantage of various avoidance activities to which they don ’ t have access. others may suffer the theft or loss of a currency hoard, possibly resulting in feelings of regret after the fact, and place the blame on the negative rates. the hoarding of cash itself is an unproductive investment that drains resources from the financial sector of the economy, and consequently, may result in less efficient payments, difficulties in obtaining loans, and other problems. ben s. bernanke and vincent r. reinhart, “ conducting monetary policy at very low short - term interest rates, ” paper presented at the international center for monetary and banking studies lecture, geneva, switzerland. january 14, 2004. see the securities and exchange commission, “ sec adopts money market fund reform rules : rules provide structural and operational reform to address run risks in money market funds ” july 23, 2014 http : / / www. sec. gov / news / pressrelease / detail / pressrelease / 1370542347679 for a discussion of reforms that limited fixed nav designs for money market mutual funds to retail and treasury - only funds. a theoretical model that captures this idea is described in jess benhabib, stephanie schmitt - grohe, and martin uribe, “ the perils of taylor rules, ” journal of economic theory 96, ( january / february 2001 ) : 40 – 69. there have been a couple of informal polls by swiss newspapers. for instance, in december 2014, after the snb first announced negative rates ( 25 bps ), the tagesanzeiger ( one of the biggest swiss newspapers ) asked readers whether the decision was a good one. of the respondents, 47. 7 percent said, “ yes, it ’ s necessary to maintain the exchange rate ” [ the floor was still in place then ], while 52. 3 percent said, “ no, this policy punishes savers. ” http : / / www. tagesanzeiger. ch / wirtschaft / geld / geldpolitik - nationalbank - fuehrtnegativzinsen - ein / story / 26525077 ). bis central bankers ’ speeches conclusion even

in an environment of low real rates of interest, most arise only when nominal rates turn negative. 1. avoidance why do people say there is a lower bound on interest rates at zero? our simple proposition is that people would not invest a dollar in an account or bond from which they could expect to recoup only an amount less than a dollar so long as they could alternatively and costlessly put their money in currency – an investment in which a dollar remains a dollar. if everyone could costlessly invest in currency rather than in activities bearing negative rates, then there wouldn ’ t be any negative rate activity in which people would invest. consequently, the negative interest rates in many european countries indicate that it is costly to invest in currency to earn a zero nominal rate of interest. why is this the case? first, currency is bulky and weighty. for example, a million u. s. dollars, made up solely of $ 100 bills, would form a stack measuring approximately 43 inches or 109 centimeters in height and weighing 22 pounds or about 10 kilos. consequently, currency is inconvenient to use, especially for those who seek to make large investments or payments. second, currency is subject to theft, requiring a big investment in security and insurance. third, recounting currency every time it is moved or transferred between people entails time and expense. finally, currency is subject to degradation, accident, fire, counterfeiting, and other mishaps. because currency is costly to invest in, then we could refine the proposition we stated earlier to say that a person would invest a dollar in an account or bond that promises to pay back less than a dollar so long as the person could not preserve more of his or her initial wealth by investing in currency, net of its costs. so one might suggest that it is the negative net return on currency that establishes the lower bound to interest rates – zero is only a rough approximation. this formulation is sharper, certainly, but it may also be too blunt for the following reason. notice that the costs of handling currency vary by the size of the investment one is considering. an ordinary person, with a few hundred or a few thousand dollars to invest, may find it perfectly convenient to invest in currency, and to store most of it in a safety - deposit box, one that the person may well have already rented to store important papers or other valuables. a large corporation, in contrast, likely would find dealing in bis central bankers ’