Address by Dr Chris Stals, Governor of the South African Reserve Bank, at a Conference on "Growing the South African Economy", arranged by the Bureau for Economic Research of the University of Stellenbosch. 1. Intermediate objectives of monetary policyThe ultimate objective of macroeconomic policy in South Africa, as in most other countries of the world, is to promote a better standard of living for all the people of the country. A prime condition for the achievement of this objective at this stage would be to create more jobs and reduce total unemployment in the country as quickly as possible. The solution to the problem must also be sustainable and not only of a temporary nature that will at some later stage collapse to create even greater poverty and more hardships.Monetary policy, as one of the more important components of overall macroeconomic policy, must obviously also serve this overriding objective of macroeconomic policy. And yet, monetary policy is seldom used directly for the creation of more jobs, or for the improvement of the living standards of the community. It is widely accepted that the contribution monetary policy should make to the achievement of the ultimate objective is an indirect one. Monetary policy has but a supporting role to play in the broader framework of overall macroeconomic policy. The ultimate goal assigned to monetary policy within the framework of overall economic policy is an intermediate one. The role of monetary policy must be to create a stable financial environment that will be conducive to economic growth, and that will make optimum or maximum economic growth possible. Financial stability on its own may not guarantee or even stimulate the development needed for the attainment of the ultimate goal, but without financial stability, sustainable economic growth will also not be attainable.There may be differences of opinion on what kind or what degree of financial stability will serve the objective of maximum economic development best. For example, in the contemporary economic theory there is the ongoing debate on the importance of the so-called Philips curve trade-off between inflation and growth. There are many growth economists who believe that some inflation will be good for growth, but there are also the purist monetarists who insist that all inflation, even at a very low rate, will in the longer term be detrimental for growth.There will also always be differences of opinion on how the monetary authorities should implement the various policy instruments at their disposal to achieve the objective of a stable financial environment. Should policy, for example, be pursued through a market-oriented system, or rather through direct controls over financial activities?There will, finally, be differences of opinion on how financial stability should be defined. Must the central bank for example, strive to keep the internal value of the currency stable, that is to keep inflation low, or should it rather try to fix the external value, that is the exchange rate of the currency? In the short term, there may at times be apparent clashes between these two objectives, although in the longer term trends in the external and internal values of the currency of any country will tend to converge into a uniform rate of change.The most important principle to agree to, however, is the notion that the function of monetary policy should be restricted to that of protecting the value of the currency, and of creating a stable financial environment that will support and promote optimum economic growth. 2. The role of monetary policy in South AfricaIn both the South African Reserve Bank Act and the Constitution of the Republic of South Africa the Reserve Bank has been tasked with the function of protecting the value of the rand. No definition for an acceptable value of the rand has been provided by the legislature, neither has any norms or standards been provided for the measurement of the achievements of monetary policy.This mandate for monetary policy was recently reconfirmed in the Government's Macroeconomic