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Distributed Global Financial Systems for Society

Periodic Reporting for period 2 - DOLFINS (Distributed Global Financial Systems for Society)

Reporting period: 2016-09-01 to 2018-05-31

DOLFINS addresses the global challenge of making the financial system better serve society. It does so by placing scientific evidence and citizen participation at the centre of the policy process in finance. The project strives to give scientific evidence and citizen participation central roles in the policy process concerning finance. DOLFINS focuses on two crucial and interconnected policy areas: How to achieve financial stability and how to facilitate the long-term investments required by the transition to a more sustainable, more innovative, less unequal and greener EU economy. We delivered quantitative tools to evaluate policies aiming to tame systemic risk and to foster sustainable investment. The tools are based on fundamental research combining network models and algorithmic game theory with broader economic insights. This approach provides a more satisfactory understanding of credit, risk and sustainable investments in an interconnected world. We investigated how to engage citizens in the early stage of the policy making process and developed evidence-based narratives in order to better shape policies in the public interest. To this end, our project took advantage of semantic web technologies, big data and ICT in general. Given the highly technical nature of key issues in finance, we have also explored how ICT and art can facilitate citizen engagement through innovative narratives, leading to better coordinated actions of stakeholders. Overall, DOLFINS is an ambitious and yet very pragmatic project that goes at the core of what Global Systems Science is about.

O1. Investigate, by means of network models and algorithmic game theory, the process of endogenous money creation in financial networks. Design incentives to discourage financial agents from strategically exploiting complexity, and asymmetries in information and information processing speed. Design incentives to channel funds towards long-term, socially inclusive and sustainable investments and compare possible institutional structures for this purpose.
O2. Provide quantitative evaluations of policy proposals in the public debate, both from the point of view of systemic risk and sustainability, covering: (a) the EU banking structural reform and the G-SIFI’s, (b) the global network of pension funds (c) the EU Long-Term Financing measures and social finance (d) the international monetary system.
O3. Demonstrate how we can create awareness on the role of finance in society and on the influence exerted over the policy process by the financial industry and by European citizens. Demonstrate how we can engage citizens online and enable their participation in the policy making process by having a say over the management of their bank and pension savings. Investigate, through a pilot platform, what kind of ICT tools and financial instruments could facilitate the collective action of citizens to demand investments that are more in line with their societal values.
In WP1 Policy Modeling, we have developed new models and methods to address research questions related to the unintended consequences of “endogenous money” and financial interconnectedness, and their implications for financial stability and sustainable finance. We have also provided a new fundamental framework, called “mission oriented finance” to rethink the role of public finance.

In WP2 Policy Evaluation, we have developed frameworks to evaluate policies related to financial stability, growth and sustainability from a Global Systems Science perspective. In particular, we have developed metrics for climate-related financial risk that have attracted the interest of key stakeholders in sustainability.

In WP3 Citizen Engagement, we have analyzed drivers and barriers for citizens to engage in sustainable finance. By applying a Big Data workflow, we have carried out text and sentiment analysis of social media content related to EU policy issues. Moreover, in a set of behavioural experiments we analysed the incentives for players to contribute in social dilemma games that mimic situations of sustainable finance. Further, we have gained insights on engagement by means of: an impact investment pilot project on infrastructures, the Citizen Dashboard of Finance, interactive dashboards about climate risk, practitioner sessions on specific policies and social media campaigns.
In the following areas, our progress beyond the state of the art has been notable, or is having implications for policy and the EU society:

• Endogenous money creation. We have provided new analytical tools to understanding the money-creation process in the context of the complex architecture of the current financial system. This provides novel policy insights that have been shared with policy makers of various EU financial policy institutions.

• Mission-oriented innovation. We have contributed to a broader theoretical and empirical understanding of the role of public finance, in particular vis-à-vis important on-going policy debates in relation to the Capital Market Union and the Junker Plan for Europe. Prof. Mazzucato (UCL) was invited in 2017, by the European Commissioner for Research, Science and Innovation, Carlos Moedas, to draft strategic recommendations on mission-oriented research and innovation in the EU, to guide the future EU Framework Programme for Research and Innovation.

• Monetary policies and green growth. In a series of new agent-based models we have provided new understanding of macro-economic policies for financial stability. We have also examined the impact of monetary and fiscal policies in terms of investments in the green sector and in terms of the conditions allowing for the emergence of green growth pathways for the economy.

• Financial interdependences. The project has provided new methodologies or new applications to analyse systemic risk by accounting for the role of complex financial interdependencies, in collaboration with institutions such as ESRB, ECB and Bank of England.

• Financial stability policies for the banking sector and market structure. We have delivered several quantitative assessments of financial stability policies for the banking sector, in relation to the Capital Market Union reform. This analysis has drawn both from the approach of financial network models, and from the approach of agent-based modelling.

• Metrics for climate-related financial risk. We have developed metrics for climate-related financial risk that have attracted the interest of key stakeholders in sustainability such as the EPSC and DG-FISMA.

• Large graph data from economic datasets, semantic web and sentiment analysis of policy issues. The project has developed a set of new methods and carried out new applications about transforming both data from economic datasets and from text streams related to policy issues into graph databases.

• Barriers and drivers to engage citizens in sustainable finance. We have provided novel and actionable insights on civic engagement in sustainable finance based on a whole series of behavioural experiments, off-line interactions with citizens and professionals, as well as online dashboards and social media campaigns.

• Impact investing pilot project on infrastructures. We developed an impact investing pilot project for funding infrastructure and community development in Europe, which gained significant visibility with key players of impact investing such as the European Investment Bank.
Picture from Zeng and Battiston 2016.