Summary and Conclusions:

1. In their analysis most economists have assumed that Central Banks ‘exogenously’ set the high-powered monetary base, so that (short-term) interest rates are ‘endogenously’ set in the money market.

2. Vicky Chick is one of the few economists to emphasize that the above analysis is wrong. Central Banks set short-term interest rates according to some ‘reaction function’ and the monetary base (H) is an endogenous variable.

3. This latter has been better understood in practical policy discussions than in (pedagogical) analysis, so this common error has had less obvious adverse consequences for policy decisions (in the UK at least) than for analytical clarity.

4. At last, after decades in which practical policy makers in Central Banks and academics have often been talking at cross-purposes, more recently leading theorists, e.g. Svensson, Taylor, Woodford, have been narrowing the gap between academics and practitioners.