<blockquote>
<p>Could one design a cryptocurrency for economy-wide use such that inflation is kept at a healthy level</p>
</blockquote>
<p>You could program in some sort of Taylor rule response function. This would contract money supply in good times and expand it in the bad ones. Taylor rule has many nice features an optimal monetary policy rule should have <a href="https://www.jstor.org/stable/2677765" rel="nofollow noreferrer">(Woodford 2001)</a>. It could also be easily programmed, at its core its just simple reaction function: <span class="math-container">$$i_{t}=\pi _{t}+r_{t}^{*}+a_{\pi }(\pi _{t}-\pi _{t}^{*})+a_{y}(y_{t}-{\bar  y}_{t}).$$</span> where <span class="math-container">$i$</span> is nominal interest rate set by the bank, <span class="math-container">$\pi$</span> inflation, <span class="math-container">$r$</span> real interest rate, <span class="math-container">$y$</span> output and <span class="math-container">$a_i$</span> are  parameters that could be estimated and then continuously updated.</p>
<blockquote>
<p>Maybe linking GDP to cryptocurrency supply growth?</p>
</blockquote>
<p>This could perhaps work as well, this was what was advocated by monetarists such as Milton Friedman. This is known as Friedman's k-percent rule (<a href="https://www.sfu.ca/%7Ekkasa/barro83.pdf" rel="nofollow noreferrer">see Barro &amp; Gordon 1983)</a>. I think I once even saw interview with him where he joked he would be happy to see Fed replaced by computer. Although this idea fell out of favor because it was considered less optimal than lets say Taylor rule.</p>
<hr />
<p>However, there is no way of knowing what would happen in the long term. What if we discover better ways of conducting monetary policy? At some point one has to wonder if little bit of discretion is not healthy in itself.</p>

CC BY-SA 4.0
2021-12-03T05:00:44.190Z
Thanks! This should have been in my original question, but in addition to the rule on interest rate, how could the cryptocurrency rescue the economy when bad shocks (like COVID-19 or the GFC) happen?
Art
CC BY-SA 4.0
2021-12-03T09:25:34.627Z
@Art but that is already in the taylor rule. You see there is a $y_t−\bar{y}_t$ term there. So if the output $y_t$ is below its long run average $\bar{y}_t$  (e.g. because of recession) we would increase money supply (to sufficiently lower $i$) which would stimulate economy
1muflon1
CC BY-SA 4.0
2021-12-03T09:50:42.640Z
Ah I'm thinking fast responses (not having to wait until the GDP figures come out) and things like emergency relief funds.
Art
CC BY-SA 4.0
2021-12-03T10:04:03.777Z
@Art then just replace actual GDP with GDP nowcast problem solved
1muflon1
CC BY-SA 4.0
2021-12-02T22:50:43.873Z
2021-12-02T22:50:43.873Z
1muflon1
<p>Imagine an economy that everyone uses (a single) cryptocurrency as a mean of payment. You could program a cryptocurrency such that the money supply grows at a fixed amount per year, etc. but that doesn't guarantee there'd be controllable inflation/deflation if the growth in money supply doesn't go along with the real economy.</p>
<p>Could one design a cryptocurrency for economy-wide use such that inflation is kept at a healthy level? Maybe linking GDP to cryptocurrency supply growth?</p>

CC BY-SA 4.0
2021-12-03T05:16:41.980Z
Cryptocurrencies, thus far, seem to be associated with a public ledger and free entrance of competing machines and "truth" established by consensus. No privacy. Huge electricity use. Irreversible. People like privacy and less electricity use. Bankers make keyboarding mistakes and developers make bugs. Maybe the scheme you are looking for should use a well-programmed currency instead of a well-programmed cryptocurrency.
H2ONaCl
CC BY-SA 4.0
2021-12-04T00:31:15.643Z
@H2ONaCl "*and "truth" established by consensus.*" Is that worse than central bank[er]s succumbing to lobbying and other political interests? What do you mean bu "truth" in this context? "*No privacy.*" That varies by cryptocurrency. For instance, privacy in Monero is significantly stronger than that in Bitcoin.
Iñaki Viggers
CC BY-SA 4.0
2021-12-14T20:28:29.160Z
@IñakiViggers By truth I mean how many crypto-coins were sent from A to B in a particular transaction.
H2ONaCl
CC BY-SA 4.0
2021-12-14T23:16:42.027Z
@H2ONaCl That has nothing to do with consensus. In most cryptocurrencies (one exception being Monero) anyone can ascertain the amount of coins in a transaction by looking up in the blockchain the transaction ID.
Iñaki Viggers
CC BY-SA 4.0
2021-12-16T00:53:24.673Z
@IñakiViggers sounds like you need to see this from the original Bitcoin paper: "The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power". The largest pool establishes the consensus.
H2ONaCl
<inflation><central-banking><cryptocurrency>
Can we replace the central bank with a well-programmed cryptocurrency?
Art
# Can we replace the central bank with a well-programmed cryptocurrency?

(Asked by: username_0 on 2021-12-02)

Imagine an economy that everyone uses (a single) cryptocurrency as a mean of payment. You could program a cryptocurrency such that the money supply grows at a fixed amount per year, etc. but that doesn't guarantee there'd be controllable inflation/deflation if the growth in money supply doesn't go along with the real economy.

Could one design a cryptocurrency for economy-wide use such that inflation is kept at a healthy level? Maybe linking GDP to cryptocurrency supply growth?

**Tags:** inflation, central-banking, cryptocurrency
> **Comments:**
> **username_1**: Cryptocurrencies, thus far, seem to be associated with a public ledger and free entrance of competing machines and "truth" established by consensus. No privacy. Huge electricity use. Irreversible. People like privacy and less electricity use. Bankers make keyboarding mistakes and developers make bugs. Maybe the scheme you are looking for should use a well-programmed currency instead of a well-programmed cryptocurrency.  
> **username_2**: @H2ONaCl "*and "truth" established by consensus.*" Is that worse than central bank[er]s succumbing to lobbying and other political interests? What do you mean bu "truth" in this context? "*No privacy.*" That varies by cryptocurrency. For instance, privacy in Monero is significantly stronger than that in Bitcoin.  
> **username_1**: @IñakiViggers By truth I mean how many crypto-coins were sent from A to B in a particular transaction.  
> **username_2**: @H2ONaCl That has nothing to do with consensus. In most cryptocurrencies (one exception being Monero) anyone can ascertain the amount of coins in a transaction by looking up in the blockchain the transaction ID.  
> **username_1**: @IñakiViggers sounds like you need to see this from the original Bitcoin paper: "The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power". The largest pool establishes the consensus.  

---

## 1 answers

### Answer by username_3 on 2021-12-02. Score: 1

> Could one design a cryptocurrency for economy-wide use such that inflation is kept at a healthy level

You could program in some sort of Taylor rule response function. This would contract money supply in good times and expand it in the bad ones. Taylor rule has many nice features an optimal monetary policy rule should have [(Woodford 2001)](https://www.jstor.org/stable/2677765). It could also be easily programmed, at its core its just simple reaction function: $$i\_{t}=\pi \_{t}+r\_{t}^{\*}+a\_{\pi }(\pi \_{t}-\pi \_{t}^{\*})+a\_{y}(y\_{t}-{\bar y}\_{t}).$$ where $i$ is nominal interest rate set by the bank, $\pi$ inflation, $r$ real interest rate, $y$ output and $a\_i$ are parameters that could be estimated and then continuously updated.

> Maybe linking GDP to cryptocurrency supply growth?

This could perhaps work as well, this was what was advocated by monetarists such as Milton Friedman. This is known as Friedman's k-percent rule ([see Barro & Gordon 1983)](https://www.sfu.ca/%7Ekkasa/barro83.pdf). I think I once even saw interview with him where he joked he would be happy to see Fed replaced by computer. Although this idea fell out of favor because it was considered less optimal than lets say Taylor rule.

---

However, there is no way of knowing what would happen in the long term. What if we discover better ways of conducting monetary policy? At some point one has to wonder if little bit of discretion is not healthy in itself.

> **Comments:**
> **username_0**: Thanks! This should have been in my original question, but in addition to the rule on interest rate, how could the cryptocurrency rescue the economy when bad shocks (like COVID-19 or the GFC) happen?  
> **username_3**: @Art but that is already in the taylor rule. You see there is a $y_t−\bar{y}_t$ term there. So if the output $y_t$ is below its long run average $\bar{y}_t$  (e.g. because of recession) we would increase money supply (to sufficiently lower $i$) which would stimulate economy  
> **username_0**: Ah I'm thinking fast responses (not having to wait until the GDP figures come out) and things like emergency relief funds.  
> **username_3**: @Art then just replace actual GDP with GDP nowcast problem solved  

---

