This paper presents a positive theory of monetary policy in a natural-rate model. It argues that while systematic parts of monetary policy have no effect on real economic activity, monetary authorities often pursue countercyclical policies. This behavior is consistent with a rational expectations equilibrium in a discretionary environment where the policymaker has a "reasonable" objective but cannot precommit to monetary growth. The policymaker optimizes 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, so equilibrium excludes systematic deviations between actual and expected inflation, making the equilibrium unemployment rate independent of "policy" in the model. However, the equilibrium rates of monetary growth/inflation depend on various parameters, including the slope of the Phillips Curve, the costs attached to unemployment versus inflation, and the level of the natural unemployment rate. The monetary authority determines an average inflation rate that is "excessive," and also tends to behave countercyclically. Outcomes improve if a costlessly operating rule is implemented to precommit future policy choices. The value of these precommitments underlies the argument for rules over discretion. Discretion is a subset of rules that provides no guarantees about the government's future behavior. The paper develops a simple economic model to illustrate the implications of treating monetary growth as the policy instrument. It shows that monetary growth is directly related to inflation and that the policymaker's choice of monetary growth affects the inflation rate and unemployment rate. The model also shows that the policymaker's choice of monetary growth is influenced by the expected inflation rate and the natural unemployment rate. The paper concludes that in a discretionary regime, the inflation rate responds positively to the lagged unemployment rate and that the extent of countercyclical response depends on the Phillips Curve slope parameter and the relative value of the cost coefficients attached to unemployment versus inflation. The paper also discusses the implications of precommitment on monetary policy and the role of rational expectations in determining the equilibrium outcome.This paper presents a positive theory of monetary policy in a natural-rate model. It argues that while systematic parts of monetary policy have no effect on real economic activity, monetary authorities often pursue countercyclical policies. This behavior is consistent with a rational expectations equilibrium in a discretionary environment where the policymaker has a "reasonable" objective but cannot precommit to monetary growth. The policymaker optimizes 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, so equilibrium excludes systematic deviations between actual and expected inflation, making the equilibrium unemployment rate independent of "policy" in the model. However, the equilibrium rates of monetary growth/inflation depend on various parameters, including the slope of the Phillips Curve, the costs attached to unemployment versus inflation, and the level of the natural unemployment rate. The monetary authority determines an average inflation rate that is "excessive," and also tends to behave countercyclically. Outcomes improve if a costlessly operating rule is implemented to precommit future policy choices. The value of these precommitments underlies the argument for rules over discretion. Discretion is a subset of rules that provides no guarantees about the government's future behavior. The paper develops a simple economic model to illustrate the implications of treating monetary growth as the policy instrument. It shows that monetary growth is directly related to inflation and that the policymaker's choice of monetary growth affects the inflation rate and unemployment rate. The model also shows that the policymaker's choice of monetary growth is influenced by the expected inflation rate and the natural unemployment rate. The paper concludes that in a discretionary regime, the inflation rate responds positively to the lagged unemployment rate and that the extent of countercyclical response depends on the Phillips Curve slope parameter and the relative value of the cost coefficients attached to unemployment versus inflation. The paper also discusses the implications of precommitment on monetary policy and the role of rational expectations in determining the equilibrium outcome.