But that's not all. 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. When we confine the set of offline products to only those that are also traded online, both frequencies of price changes and price durations tend to converge in the two trading environments. New York: Adelphi.

Trading Slope System opinions expressed remain mine. Ladies and Gentlemen Slide 1It is a pleasure to be here with you tonight. As a tribute to your collective foresight, I would like to recall that in your meeting on 25 Juneyou were among the first to discuss the operational consequences of lowering the ECB's Deposit Facility Rate DFR to zero or below zero. This will be the topic of my remarks tonight. Last week, on 4 September, these rates were cut to 0. The ECB also decided in June to remunerate current account balances in excess of the minimum reserve requirements at the deposit facility rate as opposed to zero as was the case previously.

With these measures, we entered practically uncharted territory. When Gregory Mankiw in stated in the New York Times that "it may be time [-] to go negative", he revived an idea that may seem odd at first.

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If lowering interest rates stimulates the economy and policy rates are already very low or even zero, then why not keep cutting rates and have negative interest rates? The idea of negative rates, that is, lending and getting back say 95, may seem absurd "but remember this: Early mathematicians thought the idea of a negative number was absurd [too]".

For example, a laser requires energy to be pumped continuously to maintain a coherent state. In the financial markets, price stability requires a flow of money or credit. In the Great Depression, credit became scarce as the bubble in stock prices unwound after the "Roaring Twenties. A nonlinear third order polynomial fit is shown and illustrates that the market has been trend persistent on average over this period.

The historic academic opinion on Gesell is divided. Irving Fisher supported him and John Maynard Keynes called him "a strange, unduly neglected prophet", others a "typical monetary crank".

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I would like to answer this question today by addressing the following points: What does it mean to have one of our policy rates, the deposit facility rate, below zero? Why did we go negative? What are in principle the benefits and costs of such a move? And, with the benefit of some hindsight since June, what is the initial assessment?

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To begin with, it is important to point out that the deposit facility rate has a specific, narrow meaning: under a negative DFR, banks that have more funds in their account with the ECB than what they need to fulfil their reserve Fidelity kasutades Stock Options lose some money.

Why do banks accept such a 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.

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Banks can always choose to hold physical currency instead of electronic money in their accounts with the ECB. Since physical QQQ valikud 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.


A recent ECB study estimated the private cost of cash payments to be 1. This is substantially higher than the unit social cost of a credit transfer or other non-cash means of payments per euro of transaction.

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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. But what is then the rationale for a negative Trading Slope System on the deposit Trading Slope System 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.

The relative difference between the cost of borrowing from the ECB and the benefit of depositing with the ECB determines the incentive to lend in the interbank market. Having an active interbank market is important to obtain price signals about the transmission of policy rates into the economy. It is also important to reduce bank excessive reliance on central bank money, which has been a key factor of resilience in the post-crisis environment.

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In the words of Michael Woodford, "the demand for [overnight funds] is a function of the location of the overnight rate relative to the lending rate and the deposit rate, but independent of the absolute level of any of these interest rates.

For the sake of the argument, let me abstract from credit risk in the overnight market and assume that there is enough eligible collateral to borrow from the ECB. Hence, there would be no material difference between very short-term secured and unsecured borrowing and lending.

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Banks with excess reserves would only lend in the interbank market at a rate that is above the deposit rate.

Banks with a shortage of reserves would only borrow in the interbank market at a rate that is below the main refinancing rate. Suppose now the main refinancing rate is equal to the deposit rate.


Then there is no rate at which trade is possible. Hence, it is important to keep a spread between the main refinancing and the deposit rate in order to support market activity. Another benefit of lowering the deposit rate together with the main refinancing rate is that in the current situation with excess liquidity, short-term interest rates such as EONIA track the deposit rate more closely than the main Trading Slope System rate. When the excess liquidity increases, rates fall since less must be borrowed in the interbank market the demand curve shifts down.

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In order to make sure that the monetary policy accommodation is passed on to the interbank market under fixed-rate full allotment and excess liquidity, it is therefore not enough to lower just the main refinancing rate. In fact, the deposit rate may be the most important policy rate of a central bank in an environment of excess liquidity.

The decision to lower rates, which was accompanied by a number of other measures to stimulate credit to the economy such as "targeted" long-term operations to induce banks to lend more to the real sector and an announcement of purchases of asset-backed securities and covered bonds based on claims on the euro area real economy, is also fully in line with the ECB's forward guidance.

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Forward guidance implies that interest rates remain at present or lower levels for an extended period of time conditional on an assessment of the economic outlook. Following the June decision, the lower policy rates were transmitted well to the money market and, in line with forward guidance, market uncertainty about the expected path of policy rates fell.

In addition, the volatility of EONIA rates as well as the option-implied volatility of short-term interest rates dropped.

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The lower policy rates were also transmitted to longer maturities and to market segments other than the unsecured money market. Unsecured money market interest rates are now negative for a maturity of up two weeks. Besides, the General Collateral GC pooling repo curve as well as yields on euro area Treasury bills and notes have further adjusted.

This reflects an effective and well-coordinated preparation of market participants since the ECB first mentioned the possibility of bringing the DFR below zero.

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The fact that money market trading volumes did not fall they actually rose is remarkable given the fears some observers had expressed, informed by the Japanese experience of the s, on the potential impact on market functioning of a negative DFR and of very low policy rates more generally.

Will the transmission of lower short-term rates Trading Slope System a lower cost of credit for the real economy be as smooth? While bank lending rates have come down in the past in line with lower policy rates, there is a limit to how cheap bank lending can Trading Slope System.

The mark-up that banks add to the cost of obtaining funding from the central bank compensates for credit risk, term premia and the cost of originating, screening and monitoring loans. The need for such compensation does not necessarily fall when policy rates are lowered.

If anything, a central bank lowers rates when the economy needs stimulus, which is precisely when it is difficult for banks to find good Trading Slope System making opportunities.

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It remains to be seen whether and to what extent the recent monetary policy accommodation translates into cheaper bank lending. While this can be a valid concern, in practice, a causal chain is difficult to establish. Do low rates really lead to Trading Slope System e.

The question is whether risk-taking in the financial sector has now already gone too far, contributing to growing financial imbalances, frothy asset price valuations and too loose credit standards.