This paper analyzes monetary policy in a model where the monetary authority can choose between discretion, rules, and reputation. The authors show that in a discretionary regime, the monetary authority can print more money and create more inflation than people expect. However, these inflation surprises cannot arise systematically in equilibrium when people understand the policymaker's incentives and form their expectations accordingly. Because the policymaker has the power to create inflation shocks ex post, the equilibrium growth rates of money and prices turn out to be higher than otherwise. Therefore, enforced commitments (rules) for monetary behavior can improve matters. Given the repeated interaction between the policymaker and the private agents, it is possible that reputational forces can substitute for formal rules. Here, the authors develop an example of a reputational equilibrium where the outcomes turn out to be weighted averages of those from discretion and those from the ideal rule. In particular, the rates of inflation and monetary growth look more like those under discretion when the discount rate is high. The authors also show that when monetary rules are in place, the policymaker has the temptation each period to "cheat" in order to secure the benefits from inflation shocks. However, this tendency to cheat threatens the viability of the rules equilibrium and tends to move the economy toward the inferior equilibrium under discretion. Because of the repeated interactions between the policymaker and the private agents, it is possible that reputational forces can support the rule. That is, the potential loss of reputation--or credibility--motivates the policymaker to abide by the rule. Then, the policymaker foregoes the short-term benefits from inflation shocks in order to secure the gain from low average inflation over the long term. The authors extend the positive theory of monetary policy from their previous paper (Barro and Gordon, 1983) to allow for reputational forces. Some monetary rules, but generally not the ideal one, can be enforced by the policy-maker's potential loss of reputation. They find that the resulting equilibrium looks like a weighted average of that under discretion and that under the ideal rule. Specifically, the outcomes are superior to those under discretion--where no commitments are pertinent--but inferior to those under the ideal rule (which cannot be enforced in our model by the potential loss of reputation). The results look more like discretion when the policy-maker's discount rate is high, but more like the ideal rule when the discount rate is low. Otherwise, they generate predictions about the behavior of monetary growth and inflation that resemble those from our previous analysis of discretionary policy. Namely, any change that raises the benefits of inflation shocks--such as a supply shock or a war--leads to a higher growth rate of money and prices.This paper analyzes monetary policy in a model where the monetary authority can choose between discretion, rules, and reputation. The authors show that in a discretionary regime, the monetary authority can print more money and create more inflation than people expect. However, these inflation surprises cannot arise systematically in equilibrium when people understand the policymaker's incentives and form their expectations accordingly. Because the policymaker has the power to create inflation shocks ex post, the equilibrium growth rates of money and prices turn out to be higher than otherwise. Therefore, enforced commitments (rules) for monetary behavior can improve matters. Given the repeated interaction between the policymaker and the private agents, it is possible that reputational forces can substitute for formal rules. Here, the authors develop an example of a reputational equilibrium where the outcomes turn out to be weighted averages of those from discretion and those from the ideal rule. In particular, the rates of inflation and monetary growth look more like those under discretion when the discount rate is high. The authors also show that when monetary rules are in place, the policymaker has the temptation each period to "cheat" in order to secure the benefits from inflation shocks. However, this tendency to cheat threatens the viability of the rules equilibrium and tends to move the economy toward the inferior equilibrium under discretion. Because of the repeated interactions between the policymaker and the private agents, it is possible that reputational forces can support the rule. That is, the potential loss of reputation--or credibility--motivates the policymaker to abide by the rule. Then, the policymaker foregoes the short-term benefits from inflation shocks in order to secure the gain from low average inflation over the long term. The authors extend the positive theory of monetary policy from their previous paper (Barro and Gordon, 1983) to allow for reputational forces. Some monetary rules, but generally not the ideal one, can be enforced by the policy-maker's potential loss of reputation. They find that the resulting equilibrium looks like a weighted average of that under discretion and that under the ideal rule. Specifically, the outcomes are superior to those under discretion--where no commitments are pertinent--but inferior to those under the ideal rule (which cannot be enforced in our model by the potential loss of reputation). The results look more like discretion when the policy-maker's discount rate is high, but more like the ideal rule when the discount rate is low. Otherwise, they generate predictions about the behavior of monetary growth and inflation that resemble those from our previous analysis of discretionary policy. Namely, any change that raises the benefits of inflation shocks--such as a supply shock or a war--leads to a higher growth rate of money and prices.