THEORIES of monetary and financial markets are generally concerned with the behavior of broad aggregates. As yet, economists have not successfully blended the rich variety of institutional details that make up the financial markets with the theory of relative prices. Perhaps as a result of our procedures and the state of knowledge, our policy recommendations are often suggestions for pervasive changes in institutional arrangements. Many of our perennial policy debates are concerned with issues such as whether or not the Federal Reserve should be replaced by an immutable rule or whether banks should be prevented from independently creating money

IN AN earlier article in this Journal and in several other places, evidence has been presented supporting a theory of the demand for money that is a part of the "wealth adjustment process." The posited demand function has successfully passed a large number of tests in competition with more than a dozen alternatives, representing the bulk of substantive work on the demand for money in the past thirty years. Though no series of tests is "definitive," the evidence from tests against alternatives is of crucial importance in establishing the economic relevance of the particular demand function. I regard such tests as preliminary to —and far more important than—"Chow tests," "Theil-Nagar tests," "Durbin-Watson tests," and other sophisticated statistical procedures for establishing the relevance of particular hypotheses.4 However, the accumulating evidence suggests that the use of refined statistical procedures may now be desirable. I welcome the opportunity presented by the comments of Courchene and Shapiro to present some of the available evidence on the points that they raised.

FOR ALMOST TWO DECADES a virtually impenetrable curtain has separated two groups of monetary economists. One group has engaged in a learned and apparently interminable discussion concerned with the subtleties of Pigou effects, Lerner effects, and Keynesian effects, the existence or absence of money illusions, dichotomization of real and money prices, Hicksian weeks, and related esoterica. The other is ostensibly concerned with the "world's work", a range of interests that encompasses the details of monetary policy operations. Included among the subjects of discussion in recent years have been the nature of open market operations, their restriction to Treasury bills, the nature and timing of other Federal Reserve actions, the comparative advantages of ad hoc institutional devices, the possibilities of "twistÃng"* the yield curve, and similar issues.