Monetary Policy Proposal #5 Rationale from Demian

I propose 4.5% interest rate for 7 days, close to the current level of Fed Funds.
What’s the “normal” interest rate for Eco? We don’t know. Markets will determine the “correct” interest rate under different scenarios. We need to kick the tires of the new monetary tools.

Risky assets tend to have higher interest rates than the risk free rate (I don’t intend to discuss CAPM or similar here, but you get the idea). At the same time, other cryptos don’t even have this possibility.

So lets start with a neutral rate and as the market deepens we will have a better sense of the reaction function. Am I sure this is the right rate? absolutely not! I see this as a reasonable starting point using a reasonable benchmark.

I want to emphasize how much we really don’t know yet. In traditional inflation targeting regimes (I’m going to oversimplify here) central banks often have some type of Taylor tule, where real interest rates depend on a variety of factors, chief among them inflation. Here we don’t have a well defined CPI, we don’t know know the neutral real rate of interest, we don’t know how eco will react to monetary shocks. The list goes on. Many of these issues are simply lack of data which we will obtain over time. Some (like what’s the right CPI) require more than just data. ’

How much data is enough data?
The truth is that you never fully know even with existing currencies. I was deputy governor of the central bank of Argentina and a member of its monetary policy committee. So imagine we had plenty of data. Nevertheless, the sources of uncertainty are always present. I wanted to emphasize that when you have a new instrument, there’s much to gain from experience.

For example, at the central bank we had econometric models to guide our decisions (I was a big supporter of the quantitative effort). Like with all models you need to be aware of when the necessary abstractions from full reality may fail you.

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