These lectures were presented in Milan in abbreviated form on November 9, 1999 at Banca Commerciale Italiana and on November 10, 1999 at Bocconi University as the biannual Raffaele Mattioli Lecture. We are grateful to the staff at BCI and Bocconi, and for the useful comments from the discussants: Patrick Artus, Giovanni Barone–Adesi, Giampio Bracchi, Marco Pagano, Luigi Spaventa, Mario Saranelli, and Gianni Toniolo. In addition we would like to acknowledge the contribution of Barbara Rindi from the Scientific Committee of Bocconi University. We used the occasion to try to summarize a line of research that we had been pursuing for the past fifteen years. Our theoretical work in this area was interrupted by Stightz going to Washington, as a member and then Chairman of the President's Council of Economic Advisers, and then as Chief Economist of the World Bank and its Senior Vice President for Development. While the seven years in Washington had interrupted our formal research program, the events surrounding that tumultuous period provided what could not have been a better testing ground for the ideas that we had been developing. We became increasingly convinced not only that our ideas were right, but that they were important and relevant: that had the perspectives on monetary policy that we had been developing been widely adopted, for instance, the IMF might well have managed the global financial crisis of 1997–1999 far better.