Address by Dr Chris Stals, Governor of the South African Reserve Bank, at a Conference on Current Economic Policy Issues arranged by he Economics Department of the University of Durban-Westville and The Mercury, Durban.   1. The objective of monetary policyThere is fairly general consensus in the world of central banking today that the objective of monetary policy should be to protect the value of the currency. There was a time up to the late 'seventies when economists and central bankers advocated a much wider role for monetary policy in the management of the macro economy. Under the influence of the Keynesian demand management approach, monetary policy was seen as a useful instrument to be used by the authorities to depress demand in times of an excessive rise in total real expenditure on goods and services, or to stimulate real demand in times of recessionary conditions.Monetary policy may have been an effective instrument for the purpose of demand management in the global system of fixed par values, or in the times of Keynes' General Theory of Employment, Interest and Money, (1936), when a lack of overall demand caused production resources to remain under-utilised. During the 1970's, however, the Bretton Woods System of fixed par values was replaced with the global system of floating exchange rates and over-stimulation with expansionary monetary and fiscal policies created inflationary pressures and persistent balance of payments crisis situations.The emphasis in macroeconomic policy gradually shifted from demand-side management to supply-side expansion in which monetary policy was assigned a different role. Monetary policy was no longer accepted as a useful short-term anti-cyclical policy instrument, but was tasked with the responsibility of creating on a continuous basis a financial environment that will be conducive to sustainable optimum economic growth in the longer term. This environment can be characterised by stable overall financial conditions in which the rate of inflation will at all times be low.In this new approach, central banks focused their attention on major financial developments such as changes in the money supply and in bank credit extension, the level and the structure of interest rates, changes in the official foreign reserves of the country, and movements in the exchange rate. The ultimate objective of monetary policy became the value of the currency, and whatever strategies were followed with the implementation of monetary policy, the success or failure of the policy was measured by the level of inflation.The major industrial countries were extremely successful with this new approach, and during the eighties most major economies succeeded in reducing inflation to relatively low levels, that is, in general to about 1 to 2 per cent per annum. This left but little choice for the smaller economies of the world to follow suit, particularly as the drive towards global financial integration gained more momentum during the ninety- nineties.The odd old-time economist who believes that contemporary monetary policy is on a wrong track, particularly in the developing economies, still surfaces from time to time. The counter-argument is often based on the so-called Philips Curve or an assumed trade-off that is perceived to exist between inflation and economic growth. There is sufficient evidence to confirm, however, that in the longer term, maximum economic growth is invariably attained at the lowest possible rate of inflation. The development of the theory of rational expectations questions the validity of the existence of a Philips Curve trade-off, even in the short term.Be that as it may, a country such as South Africa with its open economy can hardly maintain overall financial stability unless its rate of inflation stays more or less in line with the average rate of inflation in the economies of its major international trading partners and competitors. 2. The South African experienceOn recommendation of the De Kock Commission of Inquiry into the Monetary System and Monetary Policy in South Africa, the S