Weidmann: Naturally, the central bank must address the effects of climate change and understand its impact on the inflation process. For example, CO2 pricing influences inflation. The central bank needs to understand how climate change risks alter its balance sheet, as banks receive central bank money against collateral, and the valuation of these securities depends on their risks. However, these points are separate from the question of adding an extra objective for the ECB, which I am critical of.

Weidmann: It would almost inevitably lead to a trade-off between different objectives. Central bank measures that benefit one goal can hinder another. Typically, the central bank’s monetary policy is cyclical. It stimulates when inflation is too low in the medium term and applies brakes when the economy overheats and prices rise sharply. The crucial fight against climate change is a structural, long-term task, independent of the economic cycle. It persists even when the central bank tightens its monetary policy. This inherent contradiction shows up in situations where the ECB would need to apply brakes for price stability while simultaneously promoting climate change investments with favorable financing conditions. This inconsistency makes accountability harder. There are also additional problems.

Weidmann: If it appeared that the ECB was more interested in climate policy or other political goals than in stable money, it could negatively affect inflation expectations. Ensuring price stability would become harder, and trust in the single currency could suffer. The ECB should therefore retain a clear mandate. The central bank governors and ECB Council members are not elected by the people, despite overseeing a crucial policy area. Their independence is a unique feature in a democracy, but a well-founded one. Independent central banks deliver more reliable monetary stability. With a narrow mandate, this is acceptable. But if the central bank had to balance various political goals, prioritise government objectives, or counter them, it wouldn’t be the job for independent but unelected experts – it would be for parliaments and governments.

Jens Weidmann and Emanuel Mönch jointly head the newly established Centre for Central Banking at the Frankfurt School of Finance & Management (FS), which was founded in early 2024. The Centre focuses on research related to all issues relevant to central banks and serves as a network for stakeholders in this field. Jens Weidmann was President of the Bundesbank from 2011 to 2021 and has been Chairman of the Supervisory Board at Commerzbank since 2023. Emanuel Mönch is Professor of Financial and Monetary Economics at FS. From 2015 to 2021, he was Head of Research at the Bundesbank and worked as an economist at the Fed New York from 2007.

Mönch: I agree. The tools available to a central bank are not ideal for advancing climate policy. CO2 pricing and subsidies for research and development of climate-friendly technologies can achieve much more. Nevertheless, as Mr. Weidmann mentioned, it is essential for central banks to understand the macroeconomic impacts of climate change and the transition to a CO2-neutral economy, integrating these into their forecasts and monetary policy decisions.

Weidmann: Frankfurt is the best location for a central bank network. It hosts two central banks. ECB staff regularly meet with other Eurosystem central banks’ employees here. Frankfurt thus has a critical mass of interlocutors and stakeholders for central bank topics. This was a crucial aspect of founding the Centre. Connecting and exchanging views between central bank practitioners, scientists, and students creates added value for everyone.

Mönch: Additionally, there is often a lack of public knowledge about central banks, their functions, concerns, and workings. We are keen to engage with the broader public and inform about monetary policy.

Weidmann: This is a vital point. At the Bundesbank, surveys consistently showed a correlation between trust in and knowledge of the institution. People only trust the central bank when they understand how it works, enabling the bank to operate effectively.

Weidmann: This is a central question. As Bundesbank President, I conducted interviews with influencers to reach a younger audience not previously engaged with monetary policy, or engaged in discussions on the bank’s art collection. It’s about new formats, such as on social media or discussions with citizens. Our Centre is in its founding phase, currently primarily engaging experts for whom central bank topics and decisions are relevant – and, of course, students interested in the subject matter. These groups are not representative of the general public.

Mönch: We aim to establish the Centre as a network and discussion platform, reaching decision-makers and experts from practice, including central banks, other regulatory bodies, and financial institutions. Later, we hope to engage a broader public through events, publications via media, our website, and eventually a newsletter. Debates on central bank topics and decisions concern us all.

Weidmann: I would never call high inflation positive. But you are correct: Monetary policy has drawn more public attention. When inflation is low, there is a kind of rational inattentiveness. It is less urgent to delve into monetary policy topics and general price increases. When inflation rates reach 10%, it’s worth examining closely what the central bank is doing and how prices develop. The public engages differently with the topic at high inflation, as surveys show. However, attention to the central bank is one thing, trust in the central bank is another.

Mönch: The Banque centrale du Luxembourg (BCL) generously supports the Centre’s establishment, also financially. We are setting up a professorship, and we are currently reviewing applications. Annual workshops with BCL representatives on current central bank topics and ongoing research are planned, potentially leading to further research projects with practical relevance.

Weidmann: The BCL exemplifies the network idea at the Centre. We hope other central banks will follow suit.

Mönch: The Centre is currently under construction. We are planning programmes for training and continuing education for central bankers and specialists and executives in the banking and finance industry with intersections with central bank topics.

Weidmann: Major central banks like the Bundesbank have their own training departments and universities. Smaller banks lack these opportunities. There is thus a need for an English-language training programme in the central banking area. The Frankfurt School is one of Europe’s leading business schools in Finance. We are confident that such Master’s offerings would be well-received.

Weidmann: We have friendly exchanges with Volker Wieland from the Institute for Monetary and Financial Stability (IMFS), Florian Heider from SAFE, and other Frankfurt University professors, discussing joint events. Our target groups partly overlap, and for Frankfurt as a science location, it is a tremendous advantage that we have two excellent, research-intensive universities

Mönch: The Centre’s affiliated colleagues at the Frankfurt School research various topics relevant to central banks. Like some colleagues, I am personally interested in inflation expectations, focusing on how these develop, especially during atypically high inflation. Surveys help us understand how households and businesses adjust their expectations. We randomly select groups of individuals and provide them with different information. We then survey these groups about their inflation expectations before and after receiving the information. This helps us understand how information alters expectations. Another area our colleagues at the Frankfurt School are researching is how monetary policy affects inequality. Additionally, there is research on the long-term effects of unexpected interest rate hikes on companies’ research and development.

Mönch: Like many other researchers, we currently use AI for aspects of the research process but do not deploy it extensively. We are jointly supervising a Master’s thesis in our Data Analytics & Management programme, where students analyse central bank communications and reports using AI to predict interest rate decisions.

Weidmann: Analysing and summarising long texts or large datasets, such as inflation expectations or business reports for supervisory assessments, are some examples.

Weidmann: There are two levels. Does monetary policy need digital central bank money? And secondly, does the digital euro offer practical benefits to the public in payments? From a user’s perspective, I’m not convinced of the need for digital central bank money. We can already pay quickly, safely, and conveniently across Europe with commercial bank money – both in person and online. Fundamentally, I believe it is the task of banks, and possibly lawmakers – through regulation – to ensure that payment options continue to evolve in a customer-centric manner.

Mönch: I see potential in the programmability of the digital euro. Surprisingly, this is currently explicitly excluded.

Weidmann: The question here is whether the declining use of cash poses problems for monetary policy that should be addressed by a digital euro. And there is the question of to what extent a digital euro would affect the intermediation function of commercial banks as an important transmission mechanism of monetary policy, and jeopardise financial stability. I believe that monetary policy can continue to function well in the future even without a digital euro. If we want to introduce digital central bank money, we should limit possible negative effects on financial stability through appropriate holding limits.

Weidmann: Trust is the linchpin. If central banks raise the inflation target once to boost the economy in the short term, because this reduces the real interest rate, citizens are likely to assume that this will be repeated in the future. Inflation expectations could become unanchored, leading to loss of trust. If there is any effect at all, it dissipates quickly, leaving behind a higher inflation rate with its economic and social costs. There is much to be said for sticking to the 2% target. The ECB reviewed its target in the last strategy discussion three years ago, also considering distortions in price measurement, and essentially confirmed it. It's no coincidence that all major central banks – like the Federal Reserve, the Bank of Japan, or the Bank of England – pursue similar quantitative targets.

Mönch: Another aspect to consider is that particularly in times when inflation exceeds the target value, discussing an increase in the target would be counterproductive. We can't widen the goalposts in the European Championship just because the German team scores too infrequently. Discussing a higher inflation target now would harm the credibility of the ECB.