Klaas Knot: From Frankfurt with love - 14 years on the European Central Bank's Governing Council
Text of the first Klaas Knot Lecture, by Mr Klaas Knot, President of De Nederlandsche Bank, initiated by the University of Groningen, Groningen, 31 January 2025.
The views expressed in this speech are those of the speaker and not the view of the BIS.
Thank you Harry, for your kind introduction. I feel both honoured and humbled to give the inaugural lecture in this series that bears my name. To be frank, it also feels a bit awkward. Usually, you have to be retired or dead, or both, for such an honour. But I can assure you that neither option appeals to me at present. I rather see this as an excellent opportunity to share with you some reflections on almost 14 years of monetary policy making as a member of the ECB's Governing Council.
What is the job of a central banker? In essence, the job of a central banker is to maintain price stability by responding to different kinds of shocks. And looking back on 14 years as a member of the Governing Council, we have experienced quite a few shocks. Over time, these have affected both the demand side and the supply side of the euro area economy. Some shocks were abrupt and transitory, while others were almost permanent.
Of course, when making policy decisions, we do not have the benefit of hindsight. Like so many policy makers, central banks need to act in real-time, often with imperfect information. One of the challenges facing central banks is therefore: how should we deal with uncertainty? By assigning probabilities to certain economic outcomes, our models can - to some extent - deal with risk. But sometimes the probability that a certain event will occur is simply unknown. And some events are even completely unforeseen. In these situations we speak of fundamental – or Knightian – uncertainty (see Knight, F.H. (1921) "Risk, Uncertainty, and Profit"). When I took office, I could not imagine that we would be confronted with a major pandemic and war on the European continent. Nor do we know whether we'll face another pandemic, and what it might look like. It is fundamentally uncertain, and impossible to model.
Over the years, I've learned that, for a central banker, this implies at least two things. First of all, we should aim to design our policy choices in such a way that they are robust across different outcomes, rather than focusing on only one scenario. This means we need to consider various possible scenarios, and also think about what the outcome would be in the worst case scenario. Secondly, when our economic environment changes in a direction that was not foreseen, we need to be ready to change course swiftly. Like many professions, being a central banker requires one to "learn on the job".