Ecological money and finance—upscaling local complementary currencies

Multilateral development banks and the UN Secretary-General advocate for innovative financing mechanisms to accelerate Sustainable Development Goals (SDGs). This paper contributes by proposing a policy prototype to leverage the transformative potential of Local Complementary Currencies (LCCs). LCCs, monetary tokens backed by legal tender, facilitate exchange within specific communities and have demonstrated contributions to sustainability. However, their integration into public policy is crucial for widespread impact. The paper introduces a mechanism to endogenously manage LCC creation and destruction through bank loans and tax payments, disconnecting LCC supply from reserve funds and ensuring value through monetary system integration. Banks would exchange LCC loan impact ratings for new reserve assets at the Central Bank, with a discretionary haircut rate to mitigate moral hazard. This mechanism promotes SDGs by providing finance for sustainable projects and harnessing LCC circulation. A new Stock-Flow Consistent (SFC) model, enhanced with metrics for development capacity, resilience, and evolutionary fitness, provides analytical insight.

The paper reviews existing literature on LCCs and their contribution to sustainability, highlighting various types of alternative currencies and their evolution across four generations. It emphasizes LCCs' role in fostering ecological awareness, reorienting consumption, and promoting social ties. The authors then examine existing policy proposals for upscaling LCCs, including Varoufakis' plan for Greek complementary fiscal currencies, the use of LCCs to address auction failures during bankruptcies, and proposals for formally linking LCC communities with monetary authorities through territorial SDG strategies. The paper highlights the limitations of existing LCC frameworks, such as the legal requirement for reserve funds hindering development, and positions its proposed mechanism as a solution to these challenges.

The research employs a novel Post-Keynesian Stock-Flow Consistent (PK-SFC) model with 106 equations to analyze the proposed policy. The model includes five institutional sectors: households, production firms (divided into LCC and euro sectors), a banking sector, and a central bank. The transaction matrix ensures a watertight accounting structure, integrating real and financial aspects of the economy. Behavioral equations model household consumption, investment, and portfolio behavior, incorporating both euro and LCC components. The model includes equations for firms' investment decisions in both sectors, considering depreciation, capital stock targets, and loan availability. The banking sector's balance sheet is modeled, including loans, deposits, and reserve assets obtained through the proposed rediscounting mechanism. The Central Bank's rediscounting policy is modeled, incorporating a discretionary haircut rate based on ex-post SDG impact ratings. The model also integrates resilience metrics based on information theory, including total capacity for development, resilience, and fitness for evolution. The model's numerical properties, including accounting closure, stationary state attainment, stock-flow consistency, and meaningful variable values, are validated. The authors implement a simulation strategy involving a baseline scenario (no LCC loans) and a policy shock scenario (LCC loans and rediscounting enabled) to assess the effects of the proposed policy.

Simulations demonstrate that the proposed policy increases LCC circulation and generates a short-lived (7 periods) economic expansion fueled by new LCC loans to social businesses. This expansion leads to increased LCC investment and consumption, and profits. The policy induces sustainable structural change, evidenced by increased capacity for development, resilience, and evolutionary fitness. The simulations show increased financial stability, higher banking sector profits, and household savings diversification with the inclusion of LCC assets. The model's accounting closure is validated, confirming the consistency between income and expenditure definitions of GDP. The analysis reveals a short-term increase in macroeconomic spending and private sector profits driven by LCC circulation and expansion of the social business sector. Additional investment in euros occurs in response to the overall economic growth. While the spillover effect of this growth on non-SDG related sectors is acknowledged as ambiguous, the analysis suggests that the increase in overall investment may accelerate SDG transformation. The enhanced financial stability is characterized by a higher reserve-to-loan ratio for banks, increased profits due to higher loan volume and reserve inflows from rediscounting, and diversified household financial wealth including LCC holdings.

The findings suggest the prototype policy effectively addresses the research question of upscaling LCCs for sustainable finance. The short-lived economic expansion is driven by SDG-aligned investments, demonstrating the potential of LCCs to bridge the finance gap for social businesses. The increased resilience and evolutionary fitness indicators support the biomimetic approach of aligning economic systems with natural systems for long-term stability. The increased financial stability and diversified household wealth indicate reduced risk and enhanced system robustness. However, the study acknowledges the potential for unintended consequences, such as spillover effects on non-sustainable sectors. Further research is needed to fully understand these dynamics and optimize the policy's design for maximizing sustainability impacts.

The proposed policy prototype for integrating LCCs into the monetary system offers a promising approach to scaling up SDG financing. Simulations suggest short-lived economic expansion, enhanced financial stability, and increased systemic resilience and evolutionary fitness. Future research should focus on refining the model to incorporate endogenous structural change and exploring optimal governance structures for implementing the policy. Small-scale pilot experiments are recommended to assess the policy's real-world efficacy and inform future refinements.

The model's simplification, such as the exclusion of a government sector and the use of exogenous interest rates, may limit the generalizability of the findings. The stochastic nature of the SROI impact ratings and the haircut rate introduces uncertainty. The model does not explicitly model potential negative spillover effects of LCC-induced growth into non-sustainable sectors. Further research is needed to address these limitations and investigate the policy's effectiveness under more complex and realistic conditions.