cost of depositing excess reserves with the central bank? the answer is that the alternatives to depositing excess reserves are also costly. in fact, the cost of using alternatives to central bank deposits determines to what extent the rate on excess reserves can go negative in practice. banks can always choose to hold physical currency instead of electronic money in their accounts with the ecb. since physical currency has a zero nominal rate of return, there is what i would call an “ economic lower bound ” for the rate on excess reserves. it is difficult to identify but it is not zero because the effective rate of return on currency is negative. one does not even need to impose a demurrage rate or regular stamping on banknotes, as irving fischer has proposed based on gesell ’ s ideas. 4 there is a cost of storing, holding, and more importantly, using physical currency. 5 this involves the cost of renting, maintaining and securing storage facilities such as vaults as well as the cost of shipping currency around in a safe and timely manner. a recent ecb study estimated the private cost of cash payments to be 1. 1 % of gdp on average in the participating countries. 6 the unit social cost was estimated at 2. 3 cents per euro of transaction. this is substantially higher than the unit social cost of a credit transfer or other non - cash means of payments per euro of transaction. because the overnight unsecured money market alone currently involves hundreds of banks with an aggregate transaction volume of around € 40 – 50 billion every day, replicating this scale of transacting with physical money would be a formidable and costly task, both privately and socially. i would not go as far as kenneth rogoff and conclude that having only electronic money, by pushing down the economic lower bound, would recreate room for manoeuvre for central banks in a protractedly low inflation environment. 7 the ecb is committed to bringing euro area inflation back at a level below but close to 2 %, in line with its mandate. but what is then the rationale for a negative rate on the deposit facility? why impose a cost on banks ’ excess reserves? one should view the negative rate in the context of the ecb ’ s aim to provide further monetary policy accommodation inter alia by lowering policy rates without impairing market intermediation. 8 there are a number of reasons why it is desirable to keep a certain distance stamping of banknotes was famously tried in the city of wo

fallen by nearly half since their peak in mid - 2012 ( at € 572bn on 3 september, € 541bn below their peak level reached in july 2012 ), market fragmentation in the euro area is still present. 14 if banks with excess reserves are predominately highly profitable banks located in non - stressed countries, then a potential adverse effect on bank profitability may be less of a concern from the financial stability perspective. similarly, if banks have good reason to borrow from the ecb, for instance when other sources of funding are not available, and if those banks that borrow are not necessarily the same as those that deposit with the ecb, then excess liquidity in the banking system may not fall. what about the impact of negative rates on market fragmentation in the euro area? evidence from actual money market transactions shows that fragmentation still significantly hampers the smooth transmission of lower rates across the euro area. banks located in non - stressed countries can now borrow in the overnight unsecured market at negative rates. rates for borrowers located in stressed countries are mostly positive and the distribution of rates is wide, ranging from slightly negative to slightly above the main refinancing rate. that said, there is some evidence that lower rates have reduced fragmentation in secured markets. the search for yield in the low rate environment has increased the demand for there is evidence that the lower interest rate environment in the united states adversely affects money market funds, see kacperczyk, m. and m di maggio, 2014, “ the unintended consequences of the zero lower bound policy ”, working paper, columbia business school. this is, however, less of a concern in europe where money market funds are not central to the financial system. for more information, see the ecb report “ financial integration in europe ” ( april 2014 ). bis central bankers ’ speeches higher yielding, but still safe products such as repo or sovereign bonds, including those of non - core countries. 15 the higher demand has pushed down and thus compressed interest rates in secured markets. let me conclude. given the theoretical arguments for and against lowering some policy rates into negative territory, and given the practical experience so far, what is the verdict? or, coming back to the opinions on gesell : should he be considered a prophet or monetary crank? while the final verdict is certainly still out, based on the presented evidence so far, it seems fair to say that the lowering of policy rates, with the deposit rate