# Variable Interest Rate (VIR)

The Variable Interest Rate is a strategy determined by the current Kelp market conditions. Once affirmed, the rate is dynamically adjusted in order to persuade the market to change behavior so that the targets for $KELP are reached. The initial rate will start at 2.5%.

To determine the interest rate in the Kelp ecosystem, we will apply a variation of the Taylor rule, specified as:

$i = r^* + pi + 0.5(pi - pi^*) + 0.5(yi - yi^*) \tag{19}$Where:

$i$ = Nominal Kelp Interest Rate

$r^*$ = Real Kelp Interest Rate

$pi$ = Inflation Rate

$pi^*$ = Target Inflation Rate

Y = Logarithm of Real KelpAct

$y^*$ = Logarithm of Potential KelpAct

The equation shows that the difference between the nominal interest rate and real interest rate is the inflation. The expectation is for the interest rate to rise when inflation is higher than target rate or activity growth is higher than potential. Interest rate is expected to drop when inflation is lower than target or when there is slack in the economy. To convert the nominal KelpAct into Real KelpAct, we will employ the KPI as the deflator. Taylor suggests that the real interest rate should be 1.5 times inflation rate.