This paper, authored by Robert J. Barro and David E. Gordon, explores the dynamics of monetary policy in a model where the monetary authority can choose to act either discretionarily or according to a set of rules. The authors argue that while discretionary policies can lead to higher inflation and economic activity, they are not sustainable in equilibrium due to the potential for ex post inflation shocks. They introduce the concept of reputational equilibrium, where the outcomes are a weighted average of those from discretion and those from an ideal rule. The key finding is that the best enforceable rule is a combination of the ideal rule and discretion, with the weights depending on the discount rate. Specifically, the inflation rate in equilibrium is intermediate between the ideal rule (zero inflation) and discretion (positive inflation), and it tends to be higher when the discount rate is low. The paper also discusses the implications of different punishment intervals for the loss of reputation, suggesting that longer punishment intervals can improve the credibility of the rules. Overall, the analysis provides insights into how monetary policy can be designed to balance short-term benefits with long-term stability.This paper, authored by Robert J. Barro and David E. Gordon, explores the dynamics of monetary policy in a model where the monetary authority can choose to act either discretionarily or according to a set of rules. The authors argue that while discretionary policies can lead to higher inflation and economic activity, they are not sustainable in equilibrium due to the potential for ex post inflation shocks. They introduce the concept of reputational equilibrium, where the outcomes are a weighted average of those from discretion and those from an ideal rule. The key finding is that the best enforceable rule is a combination of the ideal rule and discretion, with the weights depending on the discount rate. Specifically, the inflation rate in equilibrium is intermediate between the ideal rule (zero inflation) and discretion (positive inflation), and it tends to be higher when the discount rate is low. The paper also discusses the implications of different punishment intervals for the loss of reputation, suggesting that longer punishment intervals can improve the credibility of the rules. Overall, the analysis provides insights into how monetary policy can be designed to balance short-term benefits with long-term stability.