a discretionary regime the monetary authority can print more money and create more inflation than people expect. The benefits from this sur- prise inflation may include expansions of economic activity and reductions n the real value of the government's nominal liabilities. However, because people understand the policymaker's incentives, these types of surprises--and their resulting benefits--cannot arise systematically in equilibrium People ad just their inflationary expectations in order to eliminate a con sistent pattern of surprises. In this case the potential for creating infla- tion shocks, ex post, means that, in equilibrium, the average rates of inflation and monetary growth--and the corresponding costs of inflation- will be higher than otherwise Enforced commitments on monetary behavior, as embodied in monetary or price rules, eliminate the potential for ex post surprises. Therefore, the equilibrium rates of inflation and monetary growth can be 1 tary institutions that all to ones that enforce rules ten monetary rules are in place, the policymaker has the tempt each period to cheat" in order to secure the benefits from inflation shocks B f existing distortions in the economy, these benefits can accrue enerally to private agents, rather than merely to policymaker.)How ever, this tendency to cheat threatens the viability of the rules equilibrium and tends to move the economy toward the inferior equilibrium under dis cretion. 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--moti vates the policymaker to abide by the rule. Then, the policymaker foregoes the short-term benefits from inflation shocks in order to secure the gaIn a discretionary regime the monetary authority can print more money and create more inflation than people expect. The benefits from this sur￾prise inflation may include expansions of economic activity and reductions in the real value of the government's nominal liabilities. However, because people understand the policymaker's incentives, these types of surprises--and their resulting benefits- -cannot arise systematically in equilibrium. People adjust their inflationary expectations in order to eliminate a con￾sistent pattern of surprises. In this case the potential for creating infla￾tion shocks, ex post, means that, in equilibrium, the average rates of inflation and monetary growth--and the corresponding costs of inflation-- will be higher than otherwise. Enforced commitments on monetary behavior, as embodied in monetary or price rules, eliminate the potential for ex post surprises. Therefore, the equilibrium rates of inflation and monetary growth can be lowered by shifts from monetary institutions that allow discretion to ones that enforce rules. When monetary rules are in place, the policymaker has the temptation each period to "cheat" in order to secure the benefits from inflation shocks. (Because of existing distortions in the economy, these benefits can accrue generally to private agents, rather than merely to the policymaker.) How￾ever, this tendency to cheat threatens the viability of the rules equilibrium and tends to move the economy toward the inferior equilibrium under dis￾cretion. 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--moti￾vates the policymaker to abide by the rule. Then, the policymaker foregoes the short-term benefits from inflation shocks in order to secure the gain