Search

Little has contributed more to the emergence of today's world of financial globalization than the setup of the international monetary system. In its current shape, it has a hierarchical structure with the US-Dollar (USD) at the top and various other monetary areas forming a multilayered periphery to it. A key feature of the system is the creation of USD offshore – a feature that in the 1950s and 60s developed in co-evolution with the Bretton Woods System and in the 1970s replaced it. Since the 2007–9 Financial Crisis, this ‘Offshore US-Dollar System’ has been backstopped by the Federal Reserve's network of swap lines which are extended to other key central banks. This systemic evolution may continue in the decades to come, but other systemic arrangements are possible as well and have historical precedents. This article discusses four trajectories that would lead to different setups of the international monetary system by 2040, taking into account how its hierarchical structure and the role of offshore credit money creation may evolve. In addition to a continuation of USD hegemony, we present the emergence of competing monetary blocs, the formation of an international monetary federation and the disintegration into an international monetary anarchy.

How to finance the Green Transition towards net-zero carbon emissions remains an open question. The literature either operates within a market-failure paradigm that calls for a Pigou tax to help markets correct themselves, or via war finance analogies that offer a ‘triad’ of state intervention possibilities: taxation, treasury borrowing, and central bank money creation. These frameworks often lack a thorough conceptualisation of endogenous credit money creation, for instance when resorting to loanable funds theory, and disregard the systemic and procedural dimensions of financing the Green Transition. We propose that ‘monetary architecture’, which perceives the monetary and financial system as a constantly evolving and historically specific hierarchical web of interlocking balance sheets, offers a more comprehensive framework to conceptualize the systemic and procedural financing challenges. Using the US as an example, we draw implications of a systemic financing view while considering a division of labor between ‘firefighting’ institutions such as the Federal Reserve and the Treasury, and ‘workhorse’ institutions such as off-balance-sheet fiscal agencies, commercial banks, and shadow banks. We argue further that financing the Green Transition must undergo three ideal-typical phases—initial balance sheet expansion, long-term funding, and possibly final contraction—that require diligent macro-financial management to avoid financial instability.

The global financial crisis of 2008 has shown that the present financial system involves global systemic risks. The dimension of these risks is hard to grasp with the conceptual tools that have been developed to tackle conventional risks like fire or car accidents. While modern societies know quite well how to deal with conventional risks, we have not yet been equally successful at dealing with global systemic risks. For managing this kind of risks, one needs to understand critical features of specific global systems where many human agents interact in ever changing complex networks. Here we apply two specific dimensions of complexity theory for dealing with global systemic risk in an integrated fashion: normal accidents and extended evolution. Both of them have successfully been applied to the analysis of systemic risks. As a paradigmatic example of global systemic risks, we focus on the global financial crisis that began in 2008, and suggest that the future evolution of the financial system could either see a further increase in complexity, or a reversal to a less complex system. We explore and contrast the implications of normal accident theory and extended evolution perspectives and suggest a four-point research strategy informed by complexity theory for better understanding global systemic risks in financial systems.

This paper argues that in order to be better prepared for future emergent crises, we need to move beyond the current scenarios based on frequentist statistical evidence, and adopt an approach that: 1. assumes a complex systems perspective to fully understand socio-environmental dynamics; 2. adopts an “ex ante” perspective on the trajectories of a system, looking for the emergence of novelty as the observer follows the arrow of time, rather than the currently used “ex post” perspective that aims to explain the origins of phenomena observed in the present, going against the arrow of time; 3. views unanticipated events as endogenously created, whenever an individual or group’s information processing is insufficient to understand, and deal with, such events. A Bayesian learning approach is proposed to reduce uncertainty. Uncertainty is viewed as the uncertainty of the observer, rather than the uncertainty of the data. This has the advantage that such learning, as an attempt to increase understanding, can be initiated when insufficient data are available to use the frequentist statistical approach. The paper makes the argument for this in both a general and a mathematical language, and then gives an example how this approach can elicit thus far insufficiently understood dynamics, in the case of temperature statistics. To conclude, it proposes a Financial Investment and Decision Tool that is based on this approach.

While most OECD countries have been rather successful in reducing risks to human lives, health, and the quality of the environment, the record for new global risks such as climate change, pandemics, financial breakdowns, and social inequality is much less convincing. This is the challenge of systemic risks. Since the global financial crisis, it has received rapidly growing attention. However, considerable conceptual confusion mars research on and practical responses to this challenge. We undertake an effort of conceptual clarification, starting with the paradigmatic example of the financial crisis. This leads to a view of global systems as involving an interplay between micro- and macrodynamics internal to the system, with the system simultaneously interacting with its environment. Such dynamics typically show periods of stability, punctuated by situations opening up several possible futures. Alternative global futures, like other prospects, constitute risks for an agent if she considers some of t...

We formulate and elicit Bayesian Belief Networks (BBNs) for assessing possible characteristics of the 2030 German new passenger car fleet, including market shares of different vehicle types, CO2 emissions, user costs, and CO2 abatement costs for internal combustion engine vehicles including hybrid electric vehicles (ICE); plug-in hybrid electric vehicles (PHEV); and battery electric vehicles (BEV). Seven technology and environmental experts from the German Original Equipment Manufacturers (OEM) sector were elicited for key relationships and conditional probability values in the model, yielding seven distinct BBNs able to predict how different future technology, economic and policy scenarios will influence model projections. The 2030 scenarios include differing amounts of technological advancement in battery development, regulation, and fuel and electricity greenhouse gas intensities. Across the expert models, 2030 baseline fleet greenhouse gas emissions are predicted to be at 50–65% of 2008 new fleet emissions. They can be further reduced to 40–50% of the emissions of the 2008 new fleet through a combination of a higher share of renewables in the electricity mix, a larger share of biofuels in the fuel mix, and a stricter regulation of car CO2 emissions in the European Union. The experts' BBNs predict that the 2030 ICE will have lower user costs per kilometer than PHEV or BEV for most scenarios, and that ICE will remain the dominant vehicle type in the 2030 German new fleet. According to all of the experts' BBNs, CO2 abatement costs are negative for the 2030 ICE in all scenarios, but can be positive or negative for PHEV and BEV, depending on the expert model and scenario assumed. Critical areas where expert models agree and differ serve to highlight where reductions in uncertainty regarding future technology, economic, environmental and regulatory relationships are most needed to improve our ability to predict and anticipate future vehicle fleet composition and vehicle performance.

When insurance firms, energy companies, governments, NGOs, and other agents strive to manage climatic risks, it is by no way clear what the aggregate outcome should and will be. As a framework for investigating this subject, we present the LAGOM model family. It is based on modules depicting learning social agents. For managing climate risks, our agents use second order probabilities and update them by means of a Bayesian mechanism while differing in priors and risk aversion. The interactions between these modules and the aggregate outcomes of their actions are implemented using further modules. The software system is implemented as a series of parallel processes using the CIAMn approach. It is possible to couple modules irrespective of the language they are written in, the operating system under which they are run, and the physical location of the machine.

IASS Discussion Paper, In order to sketch the possibility space for the future setup of the International Monetary System (IMS), this paper develops four different scenarios that outline potential outcomes of the IMS’s evolution by 2040. These scenarios derive from the analytical exercise of adopting a Money View perspective of today’s institutional shape of the IMS. The paper argues that the IMS’s current setup crucially relies on the supply of US Dollar-denominated credit money forms issued by private and public institutions outside the United States—through Eurodollar deposits, central bank swaps as well as ‘shadow money forms’ created by non-banks such as overnight repurchase agreements, money market fund shares and foreign exchange swaps. As this ‘realm’ of offshore dollar creation forms the heart of the present IMS, the four scenarios project potential institutional developments in coming decades following different trajectories. The Continued Dollar Hegemony scenario depicts the sustained dominance of private international money creation via offshore dollars within the Pax Americana. The Competing Monetary Blocs scenario envisions the US, the EU, and China as three gravitational centers with private international money creation in the blocs’ peripheries via offshore dollars, offshore euros and offshore renminbi. In the International Monetary Federation scenario, countries have created a strong publicly organized IMS, comprising a multilateral framework of one international and several regional clearing unions, based upon Keynes’ ideas for an International Clearing Union. Finally, the International Monetary Anarchy scenario entails the post-crisis emergence of a non-system with a substantial breakdown of public and private international monetary cooperation and creation.

Climate change is already underway and will continue in the future. Measurements show that Global Mean Temperature (GMT) has already increased by 0.76 °C compared to pre-industrial levels, and the climate system is committed to an additional increase of 0.6 °C due to historic emissions (IPCC 2007). Given the recent growth in global greenhouse gas (GHG) emissions (GCP 2010), this temperature increase will only be the lower boundary of what the future will bring.

Klimawandel und Finanzmarkte haben bemerkenswerte Gemeinsamkeiten, stehen aber auch in Wechselwirkung miteinander. In beiden Gegenstandsbereichen lassen sich Risiken auf unterschiedlichen Ebenen identifizieren und im Rahmen einer Risikokaskade strukturieren. In beiden Fallen mochte die Politik stabilisierend eingreifen. Sie hat aber mit der Schwierigkeit zu kampfen, dass unser Systemverstandnis jeweils recht begrenzt ist; zudem besteht Unklarheit daruber, welche Governance-Strukturen fur eine Stabilisierung jeweils geeignet sind.

If Europe is serious about reaching its target to keep global mean temperature increase below 2 °C, it must strive for a 100% renewable electricity system by 2050. The SuperSmart Grid approach combines what is often perceived as two exclusive alternatives: wide area power generation and decentralised power generation. We argue that by combining these, in fact, complementary measures, it is possible to address the crucial issue of renewable generation—fluctuating supply—in a comprehensive as well as in a technologically and economically viable manner. Thus, the SuperSmart Grid simultaneously can contribute to energy security, climate security, social security, and national security.

By providing financial security against droughts, floods, tropical cyclones and other forms of weather extremes, insurance instruments present an opportunity for developing countries in their concurrent efforts to reduce poverty and adapt to climate change. By pricing risk, insurance provides incentives for reducing risks and adapting to climate change; if these premiums are not affordable to the most vulnerable, donors can combine premium support with risk-reduction measures. In this paper, we examine the costs, benefits and risks of public-private (and donor supported) insurance programmes that offer affordable economic security to vulnerable communities and governments. Insurance mechanisms are of particular interest to climate negotiators seeking strategies that help vulnerable countries adapt to increasing severity and frequency of weather disasters, and we examine the case for including insurance mechanisms in a climate adaptation strategy expected to be agreed in Copenhagen in 2009. We present a proposal for this purpose that has been recently put forward by the Munich Climate Insurance Initiative (MCII), which calls for international solidarity for very low probability and high consequence weather-related events (high-risk layer). For middle-layer risks the MCII proposal calls for international support to promote sustainable, affordable and incentive-compatible insurance programmes that serve the poor without crowding out private sector involvement. The Geneva Papers (2009) 34, 381–400. doi:10.1057/gpp.2009.15

Economists not only failed to anticipate the financial crisis; they may have contributed to it—with risk and derivatives models that, through spurious precision and untested theoretical assumptions, encouraged policy makers and market participants to see more stability and risk sharing than was actually present. Moreover, once the crisis occurred, it was met with incomprehension by most economists because of models that, on the one hand, downplay the possibility that economic actors may exhibit highly interactive behavior; and, on the other, assume that any homogeneity will involve economic actors sharing the economist’s own putatively correct model of the economy, so that error can stem only from an exogenous shock. The financial crisis presents both an ethical and an intellectual challenge to economics, and an opportunity to reform its study by grounding it more solidly in reality.

The concept of entry into and exit out of a crisis mode of socio-ecological systems is a powerful tool for dealing with social learning in the face of large-scale risks. This concept can be used both for descriptive and normative research. We briefly sketch the concept using the example of the European heat wave in 2003.

This opinion paper is the outcome of one week of intense discussions within the working group on “Modeling of Financial Markets” at the 98th Dahlem Workshop, 2008. David Colander served as moderator of this group and Thomas Lux served as Rapporteur. We are grateful to Carlo Jaeger and Rupert Klein for organizing this stimulating meeting and to Deirdre McCloskey and Peter Sørensen and other participants for helpful comments. The present version is the reprint of Kiel Working Paper, 1489, Institute for the World Economy, Kiel, 2009, that also appeared in electronic format in many other places. A revised version of this manuscript appeared in print as Colander, D., Haas, A., Goldberg, M., Juselius, K., Kirman, A., Lux, T., Sloth, B. (2009). “The Financial Crisis and the Systemic Failure of the Economics Profession.” Critical Review, 21 (2–3), 249–267. Introduction The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemicfailure of the economics profession. Over the past three decades, economists have largely developed and come to rely on models that disregard key factors – including heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context – that drive outcomes in asset and other markets. It is obvious, even to the casual observer that these models fail to account for the actual evolution of the real-world economy. Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession.

The two-volume publication is one of the first attempts to systematically address both international climate change law and global climate change governance. The two-volume publication deals with international law and the multiple regulatory regimes reflecting fragmentation in the absence of a universal climate change regime. International climate change law, global climate governance and diplomacy are interrelated and extremely complex: The publications explore these areas from a variety of doctrinal, transdisciplinary and thematic perspectives. Volume I assesses the most pressing impacts of climate change on various international law regimes. The main focus lies on • international climate change law as a new international law discipline; • climate change and human rights; • climate change, international trade and investment law; • the law of the sea and sea level rise; • judicial review and international climate change litigation; • other subjects such as mitigation regulation, natural resource management and climate-engineering. Volume II reflects on the United Nations Convention on Climate Change (UNFCCC) and the most pressing impacts of climate change on international diplomacy and global governance. This is highlighted from various transdisciplinary and geopolitical perspectives with a special focus on the challenge of strengthening national and international climate change policy, sustainable development and increasing equity around the world, which goes beyond the capacity of national governments. Various international climate change cooperation and protection efforts are analysed, also in the context of global security, climate induced migration movements, adaptation and the loss and damage debate.

The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession's focus on models that, by design, disregard key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

Stochastic Environmental Research and Risk Assessment, 24 (2), ISSN:1436-3240, ISSN:1436-3259

A dynamic version of discrete choice theory is presented in order to enable the explicit analysis of the interaction between the micro- and the macro-level of social systems. Suppliers in a cartel market face a social dilemma. They are modelled as boundedly rational decision makers with limited foresight.A stimulus-response mechanism leads to an ergodic, time-discrete Markov-chain with a discrete state space. The resulting market dynamics exhibits a specific time-pattern of cartelisation and de-cartelisation. Most of the time, a cartel which significantly rations output is in existence. This happens though there is a permanent temptation to free ride.