This paper, authored by Stanley Fischer and published in October 1975, explores the role of monetary policy in affecting real output, particularly in the context of rational expectations. The author argues that long-term contracts, such as labor contracts, can influence the effectiveness of monetary policy, even when expectations are formed rationally. The paper makes two main arguments: 1. **Long-Term Contracts and Monetary Policy**: If there are long-term contracts that set nominal wages for more than one period, monetary policy can affect real output, even if the policy is preannounced and recognized in wage setting. This is because the monetary policy can influence the real wage through its impact on the price level, which is a key input in wage determination. 2. **Stabilizing Monetary Policy**: An active and stabilizing monetary policy reduces the need for frequent renegotiation of contracts and wage setting. This is because such a policy allows for simpler and longer-term private contracts, making them more attractive to economic agents. The paper also discusses the historical perspective on the role of monetary policy, noting that recent contributions have suggested that real output is invariant to the money supply rule if expectations are formed rationally. However, the author challenges this view by highlighting the importance of long-term contracts and the stickiness of nominal wages. The paper concludes that an active monetary policy can be effective in stabilizing output, provided it does not lead to changes in the structure of contracts. The effectiveness of such policies is independent of the assumption of conflicting objectives between wage-setting and monetary policy, but relies on the presence of nominal long-term contracts.This paper, authored by Stanley Fischer and published in October 1975, explores the role of monetary policy in affecting real output, particularly in the context of rational expectations. The author argues that long-term contracts, such as labor contracts, can influence the effectiveness of monetary policy, even when expectations are formed rationally. The paper makes two main arguments: 1. **Long-Term Contracts and Monetary Policy**: If there are long-term contracts that set nominal wages for more than one period, monetary policy can affect real output, even if the policy is preannounced and recognized in wage setting. This is because the monetary policy can influence the real wage through its impact on the price level, which is a key input in wage determination. 2. **Stabilizing Monetary Policy**: An active and stabilizing monetary policy reduces the need for frequent renegotiation of contracts and wage setting. This is because such a policy allows for simpler and longer-term private contracts, making them more attractive to economic agents. The paper also discusses the historical perspective on the role of monetary policy, noting that recent contributions have suggested that real output is invariant to the money supply rule if expectations are formed rationally. However, the author challenges this view by highlighting the importance of long-term contracts and the stickiness of nominal wages. The paper concludes that an active monetary policy can be effective in stabilizing output, provided it does not lead to changes in the structure of contracts. The effectiveness of such policies is independent of the assumption of conflicting objectives between wage-setting and monetary policy, but relies on the presence of nominal long-term contracts.