Application: Global Financial Systems background

• Goal /Aspiration for Project
• Identify system conditions and perturbations that could lead to disruptions in financial markets severe enough to degrade the national or global economy. Elucidate how large recurrent instabilities in financial systems arise, how they might be controlled and how controls influence economic growth.
• Approach/Methods/Models
• Develop Complex Adaptive System (CAS) models of interacting, large-transaction, financial and currency exchange networks interacting with economic production.
• Conduct sensitivity analyses to identify conditions that increase vulnerability and scenario analyses to evaluate potential consequences of policies on economic stability and growth.
• Status, Accomplishments and Next Steps
• Developed an abstract model of entities that interact through markets in order to obtain input resources and sell output resources.  Input and output resources for an entity are determined by its productive process, which is modeled as a set of coupled chemical reactions.  This formalism captures the behavior of economic firms as well as financial actors.  The model accommodates innovation in production processes and the creation of novel resources including financial instruments: these processes are essential components of growth in both economic and financial systems.  Exchange behavior is influenced by entities’ forecasts about future conditions and their perception of the stability of those conditions. This process is an essential part of the model because changes in risk perception are a universal feature of financial crises.
• The model has been implemented, and simple configurations have been explored to identify sensitivities.
• CASoS Goals: General Capabilities
• Loki Transact
• Interacting, adaptive networks
• Resource and exchange dynamics model
• CASoS Goals: Other Potential Applications
• Evaluate policies designed to foster innovation for their ability to increase economic output as well as to destabilize economies through creation of disruptive technologies.
• Acknowledgements
• Funding for this capability development and application has been provided by Sandia National Laboratories' Laboratory Directed Research and Development (LDRD) program and by the Department of Homeland Security through the NISAC program and builds on capabilities and knowledge developed from working with the New York Federal Reserve Bank and the Bank of Finland staff on model design and problem description.