ABSTRACT
This chapter shows how monetary policy is carried out in an analytical framework which the author caricature as "mainstream" and which has underpinned the relative success of monetary policy since the early 1980s. It describes an equilibrium model in the tradition of the rational expectations revolution in economics, which took place in the 1970s led by economists such as Robert Lucas. The chapter considers that the world had never lived in an entirely fiat money system and that the beginning was so inauspicious, the Great Moderation period that followed, with its stable growth and low inflation, must be seen as a remarkable success. It explains how and why keeping inflation low and stable is a desirable goal of economic policy. The economic structure of countries can adapt to high inflation to some extent, but not to the point of making it harmless.
