VBackground & AnalysisAnalysis
Central Banks and Trust in Money: What a Business Owner Should Understand
A banknote costs a few cents to produce and is still worth 50 euros. The difference is trust, and that trust rests above all on the central bank. An assessment of how it arises, when it wobbles, and why it affects prices, wages, and contracts in your own business.
Key takeaways
- Most of the money businesses use every day is a balance at a bank. Its value depends on trust that the central bank keeps purchasing power stable. To that end, the ECB aims for 2 percent inflation over the medium term.
- Kydland and Prescott's credibility model explains why central banks are independent: a rule you are bound by is more convincing than a promise you could break.
- Studies show that trust in the ECB falls with inflation and in crises and rises with knowledge about the central bank. Independence therefore requires accountability and understandable communication.
- For owners, the inflation target is an anchor for planning, not a promise for every year. Anyone planning prices, wages, and contracts should allow for deviations.
Why trust in money is also a question for business owners
For most businesses, money is taken for granted. Invoices are issued in euros, wages paid in euros, loans repaid in euros. Only when prices rise quickly, as in 2022, or when new forms of money appear, from Bitcoin to the digital euro, does it become visible that behind this matter of course stands an institution people must trust.
This article therefore asks: Why do people and businesses trust a central bank's money, how is that trust secured, and what follows for prices, contracts, and planning in your own business? To answer it, we first clarify what kinds of money exist, then present the credibility model, look at what research knows about trust in the ECB, weigh two readings on independence, and finally derive what an owner can do with it.
What kinds of money exist, and who stands behind them
The article The digital euro distinguishes two kinds of money. Central bank money is a claim directly on the central bank. Individuals and businesses have so far held it only as cash. Commercial bank money is a balance in an account at a bank. It makes up most of the money that flows in everyday life. In addition, there are private crypto assets and stablecoins, for which no central bank stands.
Ahmad (2026) classifies digital money by what trust rests on. The following overview applies this classification to the forms a business may deal with today.
| Form | Who stands behind it | What trust rests on |
|---|---|---|
| Cash | Central bank | The state, the central bank's independence and target |
| Bank balance | Commercial bank, backed by supervision and deposit protection | Regulated institutions and access to central bank money |
| Stablecoin | Private issuer | The issuer's reserves, supervised in the EU under MiCA |
| Bitcoin | Nobody | The protocol's rules and the computing competition |
Source: Ahmad (2026), Encyclopedia
The bank balance is the interesting case. It is private money that in everyday life is worth exactly as much as cash, because the bank can exchange it for central bank money at any time. This promise holds as long as supervision, deposit protection, and the central bank stand in the background. What happens when customers doubt it is shown in Silicon Valley Bank 2023.
What a central bank does, and what the ECB aims for
Together with national central banks such as Germany's Bundesbank, the European Central Bank sets monetary policy in the euro area. Its primary objective under the EU treaty is price stability. Since its 2021 strategy review, it understands this as inflation of 2 percent over the medium term, with deviations above and below considered equally undesirable. Its most important tool is the policy rate, currently above all the deposit facility rate, which banks receive for money held at the central bank.
The figures show how the ECB reacted to inflation. In Germany, consumer prices rose by 6.9 percent in 2022 and 5.9 percent in 2023, and by 2.2 percent in both 2024 and 2025. The ECB raised the deposit rate to 4 percent from July 2022 and lowered it to 2 percent from June 2024. In 2026, it raised it again, to 2.5 percent in September, citing renewed price pressure. The details are described in Interest rates and investment and After inflation.
An everyday analogy helps. The central bank works like a thermostat set to 20 degrees. If it gets too warm, it turns the heating down; if too cold, up again. With a window open, such as an energy price shock, it takes a while. What matters is that everyone in the house knows what temperature it is set to.
The thinking model: credibility and tied hands
Why should a central bank be independent of the government? The answer comes from a 1977 paper by Finn Kydland and Edward Prescott, for which both later received the Nobel Prize in economics. They described the problem of time inconsistency: a policy that is sensibly announced today may have an incentive to deviate tomorrow. A government that controls money itself could cut rates before an election or erode debt through inflation. If businesses and unions know this, they build the inflation into prices and wages in advance. The result is higher inflation without anyone having gained.
The way out is credibility through commitment. A clear target, an independent central bank, and a ban on directly financing governments take away the possibility of deviating. The image for this comes from the Odyssey: Odysseus has himself tied to the mast so as not to follow the song of the sirens. He does not become more strong-willed; he removes the choice. That is exactly what makes his promise credible.
If this succeeds, expectations become anchored. When businesses and employees assume that inflation will be around 2 percent over the medium term, they plan prices, wages, and contracts accordingly, and the expectation supports the target. How inflation expectations drive prices and wages is explored in Inflation expectations.
A central bank is not credible because it has good intentions, but because it has removed its own ability to act on bad ones.
What research knows about trust in the ECB
Trust in a central bank can be measured, for example in the European Commission's Eurobarometer surveys or in the ECB's Consumer Expectations Survey. Several studies have examined what it depends on.
- Performance on the target. Fischer and Hahn (2008) found for the early years 1999 to 2004 that higher inflation lowers trust in the ECB. Citizens therefore judge the central bank by its primary objective.
- Crises. Ehrmann, Soudan, and Stracca (2013) show that trust fell significantly during the financial and sovereign debt crises. The decline could largely be explained by the worse economic situation, the general loss of trust in EU institutions, and the severity of the banking problems with which the public associated the ECB.
- Knowledge. Van der Cruijsen and Samarina (2023) analyzed the ECB's consumer survey in six countries for 2020 and 2021. Trust rose with financial knowledge, education, income, and wealth, and was lower among people who could work less during the pandemic. In their conclusion, there is ample room to improve trust.
- Culture. Angino, Ferrara, and Secola (2022) examined whether cultural background causally influences trust in the ECB, beyond economic reasons.
Blinder, Ehrmann, de Haan, and Jansen (2024) summarize research on communication with the general public. They name two reasons why central banks explain more today: communication is meant to improve the effectiveness of monetary policy, and it is part of democratic accountability. In a democracy, independence demands accountability, and accountability demands intelligible language. In a 2016 survey by the authors, more than 80 percent of central bank governors said they had intensified their communication since the financial crisis. Whether this actually guides public expectations, the authors judge cautiously: some promise, but many hurdles.
Two readings: independence as protection or as a problem?
Central bank independence is not undisputed. Since the financial crisis and the large bond purchases, it has been questioned more often.
Independence as protection
- It ties the hands and makes the inflation target credible.
- It protects money from short-term political interests.
- Anchored expectations make planning easier for businesses.
Independence as a problem
- An unelected institution makes decisions with large distributional effects.
- Crisis policies such as bond purchases blur the line with fiscal policy.
- When inflation is high, citizens ask to whom the central bank is accountable.
The first reading is supported by the Kydland and Prescott model and by the experience that countries with dependent central banks more often had high inflation. The second is supported by the finding of Ehrmann, Soudan, and Stracca (2013) that trust falls precisely in crises, when the central bank acts most forcefully. I consider independence right, but only together with transparency. It is not a privilege of the central bank but an obligation: whoever cannot be voted out must explain all the more precisely what they do and why. This matches the conclusion of Blinder and colleagues (2024).
A counterexample shows how hard trust is to build without such an institution. El Salvador tried to make Bitcoin everyday money by law and failed on usage, as El Salvador and Bitcoin describes. Why trust also matters economically is discussed in Trust as an economic factor.
The money compass: what owners can derive for their business
An owner does not have to conduct monetary policy. But they should know what they can rely on and what they cannot. From the credibility model, I derive four rules that I call the money compass.
Use the target as an anchor
Plan long-term contracts, rents, and wage development with the 2 percent inflation target as the base assumption. It is the best available anchor, because the central bank lets itself be measured against it.
Allow for deviations
The target applies over the medium term, not to every year. Check what inflation of 5 percent over two years would mean for your margin, your fixed prices, and your loans, and agree in long contracts how prices will be adjusted.
Read the central bank's signals
Follow the ECB's rate decisions and their reasoning, roughly every six weeks. They show early whether financing will become more or less expensive and how the central bank assesses price pressure.
Distinguish forms of money by trust
Keep business liquidity in forms backed by supervision, deposit protection, or the central bank. Forms without this backing, such as crypto assets, are an investment decision, not a cash reserve.
| Assumption | Costs year 1 | Costs year 3 | Margin in year 3 at a fixed price of €115,000 |
|---|---|---|---|
| Costs rise by 2% a year | €100,000 | €104,000 | €11,000 |
| Costs rise by 5% a year | €100,000 | €110,250 | €4,750 |
Worked example
The values in the worked example are freely chosen. They show why a three-year fixed price based on the 2 percent target contains a risk when inflation is temporarily higher. A price adjustment rule shares this risk fairly.
Conclusion: money is as stable as the trust in those who guard it
To the guiding question: people and businesses trust a central bank's money because they expect it to be worth roughly as much tomorrow as today. This trust is secured by binding the central bank to a clear target and separating it from short-term political interests, as the Kydland and Prescott model explains. Research shows that trust falls with inflation and in crises and rises with knowledge and understandable communication. Independence therefore holds only together with accountability.
For an owner, a practical stance follows: the inflation target is a reliable anchor for planning, but no guarantee for every year. Whoever builds contracts, prices, and liquidity on it and allows for deviations makes use of trust in money without relying on it blindly.
- Check long-term contracts for price adjustment rules and add any that are missing.
- Calculate for your own margin what two years of 5 percent inflation would mean.
- Read the ECB's next rate decision and its reasoning and assess it for your own financing.
- Keep business liquidity only in forms backed by supervision, deposit protection, or the central bank.
Frequently asked questions
Why does money have any value at all?
Money has value because people expect others to accept it tomorrow as well and that it will roughly keep its purchasing power. For cash and indirectly for bank balances, the central bank stands behind it and pursues a price stability target. Without this trust, money loses its function, as periods of high inflation show.
What is the ECB's inflation target?
Since its 2021 strategy review, the ECB has aimed for inflation of 2 percent over the medium term. Deviations above and below are considered equally undesirable. The target does not apply to every single year but over a medium-term horizon.
Why is the central bank independent?
Because a government that controls money itself could have an incentive to cut rates in the short term or erode debt through inflation. Businesses and employees would anticipate this, and inflation would rise. Independence and a clear target make the promise of stable prices credible.
What does trust in the ECB depend on?
Studies show that higher inflation and crises lower trust, while financial knowledge, education, and income go along with higher trust. Central banks are therefore increasingly relying on understandable communication with the general public, whose effect research judges cautiously.
What does monetary policy mean for small businesses?
It influences the cost of loans, customers' willingness to invest, and the development of prices and wages. For owners, the inflation target is an anchor for planning. Long-term contracts should nevertheless contain rules for price adjustments, because inflation can deviate significantly at times.
Sources
- Kydland, F. E.; Prescott, E. C. (1977): Rules Rather than Discretion: The Inconsistency of Optimal Plans. Journal of Political Economy, 85(3), pp. 473-491.
- Blinder, A. S.; Ehrmann, M.; de Haan, J.; Jansen, D.-J. (2024): Central Bank Communication with the General Public: Promise or False Hope? Journal of Economic Literature, 62(2), pp. 425-457.
- Ehrmann, M.; Soudan, M.; Stracca, L. (2013): Explaining European Union Citizens' Trust in the European Central Bank in Normal and Crisis Times. Scandinavian Journal of Economics, 115(3), pp. 781-807.
- Fischer, J. A. V.; Hahn, V. (2008): Determinants of Trust in the European Central Bank. SSE/EFI Working Paper Series in Economics and Finance, no. 695.
- van der Cruijsen, C.; Samarina, A. (2023): Drivers of trust in the ECB during the pandemic. Applied Economics, 55(13), pp. 1454-1476.
- Angino, S.; Ferrara, F. M.; Secola, S. (2022): The cultural origins of institutional trust: The case of the European Central Bank. European Union Politics, 23(2), pp. 212-235.
- Ahmad, A. (2026): From Cryptocurrencies to CBDCs: A Scoping-Integrative Review Proposing a Digital Money Ecosystem Taxonomy (DMET). Encyclopedia, 6(9), 196.
- European Central Bank: Key ECB interest rates
- Federal Statistical Office of Germany: inflation rate in 2025 at +2.2% (press release, January 2026, in German)
Note. This article is based on publicly available data from the ECB and the Federal Statistical Office of Germany as well as scientific studies. It is not investment or financial advice. Interest rate figures reflect the status as of November 2026.
