Ecological money and finance—upscaling local complementary currencies

The paper addresses how to aggressively scale up SDG financing using innovative monetary mechanisms by leveraging local complementary currencies (LCCs). It positions LCCs—community-issued, purpose-driven tokens backed by legal tender deposits—as tools to re-embed money within ecological and social criteria and to promote resilience. The research question is how to integrate LCCs into formal monetary policy to unlock their structural transformation potential. The authors propose endogenizing LCC creation and destruction via bank lending and tax/loan repayment, disconnecting LCC supply from guarantee funds while maintaining convertibility. Banks would swap ex-post SDG impact certificates (from LCC loans) for central bank reserves subject to a discretionary haircut, aligning private credit with SDGs. To analyze feasibility and macro-financial effects, the authors build a new PK-SFC model with biomimetic indicators (capacity for development, resilience, fitness for evolution). The study aims to show that such a policy can produce short-run SDG-aligned expansion, enhance banking stability, and induce sustainable structural change.

The paper surveys LCCs as citizen-led, commons-oriented monetary devices complementary to the legal tender, emphasizing sociocratic governance, reciprocity, and sustainability objectives. LCCs are fully convertible into legal tender and self-limit socio-economically and spatially. Over 4000 LCCs exist globally, evolving in four generations from mutual credit (LETS) and time-banking to modern convertible LCCs and government-involved schemes. LCCs contribute to sustainability by fostering ecological awareness, reorienting consumption, and strengthening social ties. From a biomimicry perspective (Ulanowicz, Lietaer), systems balance efficiency and resilience; money should circulate through diverse organizational forms and exchanges to enhance system fitness for evolution. Excess concentration undermines resilience; LCCs can improve circulation where needed, boosting fitness and sustainability. Policy linkages reviewed include: Varoufakis’s complementary fiscal currency proposal during the Eurozone crisis; com.mons for bankruptcy auctions to mitigate fire-sale dynamics (Amato & Fantacci); and proposals to tie LCCs to public policy and accept them for taxes, with alternative backing (e.g., CO2 reduction certificates) to overcome reserve-fund constraints (Blanc & Perrissin Fabert). The literature also notes governance concerns about monetized impact, measurement challenges, and risks of greenwashing, calling for strong institutional design.

Policy mechanism: The authors propose integrating LCCs into standard monetary circuits by creating/destroying LCC deposits via bank lending/repayment and allowing convertibility into central bank reserves. Banks issue LCC loans to LCC-member social businesses whose projects align with LCC objectives. Banks accept legal tender and LCCs for repayments; the Treasury accepts LCCs for taxes (policy feature; not modeled in the core SFC). An independent impact rating agency computes ex-post social return on investment (SROI) on the stock of prior-period LCC loans and issues non-tradeable impact certificates. Banks swap these certificates at the central bank for reserves; the central bank applies a discretionary haircut to control reserve supply. Governance separates mandates: define impact (parliaments/governments/LCC communities), measure impact (multilateral rating institutions, e.g., UN), and value impact (central banks set rediscount haircuts consistent with mandates). Analytical model: A Post-Keynesian Stock-Flow Consistent (PK-SFC) model with 106 equations is built, integrating real and financial accounts via a transaction matrix with five sectors: households, firms (euro and LCC sub-sectors), banks, and central bank (no government). Money is endogenously created by bank lending; the hidden accounting identity ensures ΔM = ΔL each period. Behavioral blocks include: - National income identity with euro/LCC decomposition for GDP, disposable income, wages, consumption, investment, and profits. - Household consumption depends on disposable income and prior deposits; LCC consumption propensity modeled via a shock switch. Portfolio behavior allocates between sight deposits, savings deposits (in euros), and LCC holdings; savings demand depends on expected wealth and income. - Investment uses a partial accelerator: desired capital stock depends on lagged income (euro in euro sector; LCC income in LCC sector). Depreciation is a fixed rate of capital. Capital updates via net investment. - Banking: profits equal loan interest income minus deposit interest costs plus reserve additions from rediscounting. LCC loan rates are set below euro loan rates due to reduced risk via rediscounting. - Central bank: issues reserves against impact certificates; haircut (τ) evolves with past τ and SDG performance shocks. Initial haircut set near 4.5% (ECB benchmark for ABS at the time). - Impact ratings: SROI follows a stochastic process (Laplace innovations around 15% mean). - Resilience/biomimicry block: computes system throughput, ascendency, total capacity (C = A + Φ), and fitness for evolution F = −k a log(a) via information-theoretic measures of inter-sectoral monetary flows (households, banks, firms). Simulation design: Using Broyden algorithm, the model reaches a stationary steady state (e.g., GDP ≈ 1,579,375) under baseline with shock = 0 (no LCC lending/circulation, no rediscounting). Policy experiment sets shock = 1 to activate LCC circulation, lending, and rediscounting, with other parameters fixed, tracing transition to a new steady state. Interest rates are exogenous; SROI is stochastic; haircut adjusts endogenously to SDG performance shocks.

• Macroeconomic expansion: The policy induces a short-run SDG-driven expansion. GDP growth peaks around 3% and fades after roughly seven periods as the system approaches a new steady state. - Structural change: The shares of LCC investment in total private investment and LCC wages in total wages rise and remain permanently higher, indicating sustained structural transformation toward the social business/LCC sector. - Biomimicry metrics: Total capacity for development, resilience, and fitness for evolution increase significantly under the policy shock, moving the system toward the resilience window. - Financial stability and banking performance: The reserve-to-loan ratio increases (euro and LCC segments), suggesting enhanced banking stability. Banking sector profits rise due to higher loan volumes and annual reserve inflows from rediscounting (ΔA). - Household balance sheets: Total household financial wealth increases and diversifies, with holdings including LCC assets alongside euro sight and savings deposits. A portion of wealth becomes implicitly earmarked for sustainable consumption. - Monetary mechanics: Central bank reserves increase in step with issued impact certificates, with the haircut providing control over reserve supply; banks are incentivized to screen for SDG impact to secure reserve access. - Accounting integrity: The model satisfies SFC closure conditions—expenditure and income GDP measures coincide; the hidden equation ΔM = ΔL holds; stocks/flows take meaningful values across states.

The findings support the central hypothesis that integrating LCCs into formal monetary operations via impact-based rediscounting can align private credit creation with SDGs, generate short-run growth, improve banking stability, and promote sustainable structural change. By endogenizing LCC creation and ensuring convertibility into central bank reserves, the mechanism reconciles local, purpose-driven currencies with systemic monetary policy, leveraging biomimetic principles to enhance resilience and fitness for evolution. Policy significance includes an alternative channel for reserve provision that rewards ex-post verified SDG impact, increasing transparency and accountability relative to current collateral frameworks. However, potential spillovers of LCC-induced growth to high-emission (“brown”) sectors are ambiguous and context-dependent; empirical work is needed to assess net environmental outcomes and to design complementary safeguards. Governance design—clear mandate separation (define, measure, value impact), independent rating capacity, and robust anti-manipulation controls—is critical to mitigate greenwashing and ensure legitimacy. Overall, the mechanism offers a scalable pathway to accelerate SDG financing while embedding circulation properties that enhance systemic robustness.

The paper proposes a prototype policy that endogenizes LCC deposit creation via bank lending and links ex-post SDG impact to central bank reserve issuance through rediscounting of impact certificates. A new PK-SFC model with biomimetic indicators provides analytical support: simulations indicate a short-lived SDG-aligned expansion, improved banking stability, and higher system capacity for development, resilience, and fitness for evolution. Contributions include: (i) a feasible integration of LCCs into the monetary system without undermining central bank independence; (ii) an impact-based reserve supply mechanism; and (iii) a modeling framework capturing ecological fitness metrics. Future research directions: build richer SFC models with endogenous structural change; refine governance, accountability, and incentive structures drawing from policy history; develop datasets to measure LCC SDG impacts and multipliers; and conduct small-scale pilot experiments coordinated by multilateral institutions, central banks, domestic banks, and LCC communities. Regular multilateral workshops can foster learning and support eventual upscaling if pilots prove successful.

• Modeling scope: The core SFC model excludes the government/public sector (despite policy narratives referencing tax acceptance of LCCs), uses exogenous interest rates, and operates under stationary steady-state constructs that simplify real-world dynamics. - Valuation uncertainty: Monetizing SDG externalities via SROI entails measurement challenges; shadow pricing may not capture all interdependencies and can appear artificial. - Governance and manipulation risk: Impact ratings could be subject to bias or greenwashing without strong, transparent institutions and mandate separation. - Sectoral spillovers: Positive macro effects may partially spill over into high-emission sectors, potentially diluting environmental gains; conditions determining dominance of green vs. brown spillovers require empirical validation. - Stochastic assumptions: SROI process (Laplace-distributed around 15%) and initial haircut settings (e.g., 4.5%) are stylized; outcomes may vary with different distributions/policy rules. - Simplifications: Two production spheres (euro vs. LCC), limited asset menu, and simplified household portfolio rules constrain heterogeneity and behavioral richness.