This paper presents a positive theory of monetary policy within a natural-rate model, focusing on the implications of rational expectations and the role of policy rules versus discretion. The authors argue that while natural-rate models suggest that systematic monetary policy has no effect on business cycles, observed high and variable monetary growth rates and countercyclical policies are consistent with a rational expectations equilibrium in a discretionary environment. The policymaker, acting rationally, optimizes monetary policy subject to given inflationary expectations, which determine a Phillips Curve-type tradeoff between monetary growth/inflation and unemployment. Inflationary expectations are formed with the knowledge that policymakers will be in this situation, leading to equilibrium where actual and expected inflation are not systematically deviated. However, the equilibrium rates of monetary growth/inflation depend on parameters such as the Phillips Curve slope, the costs of unemployment versus inflation, and the natural unemployment rate. The monetary authority determines an average inflation rate that is "excessive" and tends to behave countercyclically. Outcomes improve if a costlessly operating rule is implemented to precommit future policy choices, highlighting the value of rules over discretion. Discretion is a subset of rules that provides no guarantees about the government's future behavior. The model shows that the unemployment rate is invariant with monetary policy, but the policymaker adopts an activist rule due to society's relative dislikes for inflation and unemployment. The results suggest that in the absence of precommitment, the outcomes are sub-optimal. The paper also discusses the implications of treating monetary growth as the policy instrument, showing how it affects inflation and economic activity. The results highlight the importance of precommitment in achieving optimal outcomes and the limitations of discretionary policy in the absence of such commitment. The paper concludes that the results provide a positive theory of monetary growth and inflation in an environment where precommitment is absent.This paper presents a positive theory of monetary policy within a natural-rate model, focusing on the implications of rational expectations and the role of policy rules versus discretion. The authors argue that while natural-rate models suggest that systematic monetary policy has no effect on business cycles, observed high and variable monetary growth rates and countercyclical policies are consistent with a rational expectations equilibrium in a discretionary environment. The policymaker, acting rationally, optimizes monetary policy subject to given inflationary expectations, which determine a Phillips Curve-type tradeoff between monetary growth/inflation and unemployment. Inflationary expectations are formed with the knowledge that policymakers will be in this situation, leading to equilibrium where actual and expected inflation are not systematically deviated. However, the equilibrium rates of monetary growth/inflation depend on parameters such as the Phillips Curve slope, the costs of unemployment versus inflation, and the natural unemployment rate. The monetary authority determines an average inflation rate that is "excessive" and tends to behave countercyclically. Outcomes improve if a costlessly operating rule is implemented to precommit future policy choices, highlighting the value of rules over discretion. Discretion is a subset of rules that provides no guarantees about the government's future behavior. The model shows that the unemployment rate is invariant with monetary policy, but the policymaker adopts an activist rule due to society's relative dislikes for inflation and unemployment. The results suggest that in the absence of precommitment, the outcomes are sub-optimal. The paper also discusses the implications of treating monetary growth as the policy instrument, showing how it affects inflation and economic activity. The results highlight the importance of precommitment in achieving optimal outcomes and the limitations of discretionary policy in the absence of such commitment. The paper concludes that the results provide a positive theory of monetary growth and inflation in an environment where precommitment is absent.