Empirical studies of the relationship between money and expenditures frequently seek to explain movements in aggregate expenditures by movements in some appropriate money total. For example, in the most notable recent such study, Friedman and Meiselman 1 conclude that the appropriate money total is currency plus all commercial bank deposits. Past and current changes in this variable better explain expenditure changes than do changes in each of two alternative money totals.2 The assumption implicit in such tests of the money-expenditures relationship is that the behavior of the components of any money total does not matter. Specifically, Friedman and Meiselman estimate:

Dwight Jaffee's most important criticism of my article is that the empirical estimates of the model gratuitously excluded a variable, and that this biased downward my estimate of the long-run interest elasticity of velocity. Since the most notable difference between my article and the bulk of the literature on the demand for money is my finding of an essentially zero interest-elasticity of velocity, Jaffee's criticism is surely germane. However, Jaffee has misinterpreted mv model, and, even if his misinterpretation is accepted, his empirical results do little violence to the findings. Jaffee's misinterpretation of my model can be seen by comparing his equation (2) with equation (1) in my article, which I rewrite, adopting Jaffee's notation: