The Second Life economy operates much like a national currency. There are factors that increase the amount of currency in circulation (sometimes you hear us call those 'sources'), and there are things that remove currency from circulation (often called 'sinks'). There are also a number of indicators we can measure - the foreign exchange rate (the L$ to US$ trading price), average land sales (both auction and in-world), the growth rate of new users, and consumer pricing indicators (the average price paid for typical things and the average amount of money people spend on things in a fixed period).
The challenge of monetary policy is to periodically review the indicators, and then make changes to the sources and sinks to best adapt to what trends the indicators seem to be suggesting. So, for example, if the price of land and the exchange rate against the dollar are climbing sharply, this suggests that more currency should be added to the economy. Conversely if the economy appears to be inflating (as suggested by things like an increase in consumer price indicators), currency should be removed from the economy.
In the United States, the Federal Reserve uses open market operations (buying or selling its own currency) and adjustments to the federal funds rate to attempt to implement monetary policy. For a good reference on monetary policy, see http://en.wikipedia.org/wiki/Monetary_Policy
In the case of Second Life, Linden Lab can change the size of the various sources (stipends, bonuses, dwell, and event support) and the sinks (parcel listing fees, L$ land sales, upload costs) as a way of modulating the money supply in a manner similar to the Federal Reserve. Like the Fed, our goal in making such changes is to keep the economy stable and growing.
Our policy (which will no doubt evolve and become more formal as Second Life grows) has been to take a frequent look at the leading indicators, and make adjustments to these sources and sinks. Our specific goals in making adjustments are several: To maintain a stable exchange rate against the U.S. dollar, to maintain stable overall land prices both at auction and in-world, and to maintain stability in consumer prices.
With this overview, our latest findings and intentions are below:
Recent trends in land prices, currency exchange, and pricing indicators suggest a gradual overall inflation in the linden dollar economy. In response to that trend, and incorporating general design goals and user feedback wherever possible, we will be making several changes over the coming two weeks:
+ A reduction in fees paid to support events to cover only those events deemed educational
+ A 50% reduction in the bonus amounts paid out as weekly 'Stipend Ratings'
Taken together, these two changes reduce the amount of new currency flowing into the Second Life economy by approximately L$4.5 Million per month. This is a signifigant change, corresponding to a reduction in overall economic incentives by roughly 25%.
Much of the economic data we are examining in making these policy changes are publically available in a weekly formatted spreadsheet, which can be found in the forums at
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