By drawing on an analysis of the role of monetary policy in balance of payments adjustment under different monetary systems and exchange rate arrangements, this paper focuses on the crucial issues involved when an attempt is made to set rules for monetary policy coordination in a system of fixed but adjustable exchange rates such as the European Monetary System (EMS). A proper functioning of the balance of payments adjustment mechanism is crucial for the stability of an exchange rate system. In turn, the proper working of the adjustment mechanism can be sought either through “rules,” which make the adjustment automatic, or through prompt “discretionary” changes in monetary policy, which require a close degree of cooperation among the central banks of the member currencies (and the political willingness to subordinate, when necessary, internal objectives to the external constraint).