The Political Economy of Financing Large-Scale Transformations

Off-Balance-Sheet Fiscal Agencies in Wars, Reconstruction, and the Green Transition

The OBFA-TRANSFORM project. An Emmy Noether research group

The Green Transition—a politically desired large-scale transformation of physical capital stock to reach net-zero carbon emissions—is the greatest challenge of our age. We broadly know what technically needs to happen, but one question remains unsettled: Where should the money come from to pay for it?

The established answer—using the triad of taxation, treasury borrowing, or central bank money creation—is incomplete. Rather, public authorities need to mobilize the entire “monetary architecture” for this task. The guiding hypothesis of this interdisciplinary project is that off-balance-sheet fiscal agencies (OBFAs)—hybrid public-private institutions which uniquely combine traces of monetary and fiscal policy—played a crucial role in past large-scale transformations and are best suited to do so again in the Green Transition. OBFAs’ role in financing past transformations is under-researched and not well understood.

This Emmy Noether research group investigates how large-scale transformations were historically financed, while making use of an up-to-date theory of modern credit money. Our approach is threefold:

• Build historical case studies on war finance and reconstruction finance: We study how historic monetary architectures—webs of interlocking balance sheets in which OBFAs intersect with treasuries, central banks, and private institutions such as banks and non-bank financial institutions—were mobilised by OBFAs in a systemic financing process that entails three different phases: initial balance sheet expansion; long-term funding; and final contraction. Our cases are the UK, the US, and Germany in the 20th century.
• Link the historical findings to today: We develop a historic dataset that we use to test whether OBFAs are a necessary condition for governing large-scale transformations and to assess their implications for democratic governance. Using historic best practices, we develop proposals for using OBFAs to finance the Green Transition and engage stakeholders to probe their feasibility in todays monetary architecture.
• Disseminate the findings to a broad audience: We develop an innovative interactive online tool and write a book on the political economy of financing large-scale transformations.