ABSTRACT
In developed capitalist economies, monetary policy has become the most important tool in the stabilization of business cycles. Given its good performance under these conditions, monetary policy has been enthusiastically recommended to regulate economic activity in economies in transition and developing economies. In this chapter, we review the theory as presented in basic economics texts, but we examine each step in the theory as an assumption to be empirically verified or rejected. Keep in mind that successful use of monetary policy requires certain key assumptions to be true. If these key assumptions do not hold, then monetary policy will not work.
