Stephen M. Miller quantity of money observed always falls on the money supply.Sec ond, no unique price of money exists from which market-disequi libria signa Rather, money-market disequilibria generate adjustments of varying degrees and with different timing in the in terest rate, real income, and the price level. If the monetary au- thorities increase the moncy supply, then the cconomy holds too much money. Individuals reduce their holding of money by in creased spending on goods, services, and assets. If asset demands se, then interest rates fall. If goux real income and the price level rise. a consensus exists on the tim ing of these effects; the interest rate adjusts first, followed in order by real income and the price level. As the price level finally ad justs, the interest rate and real income movements attenuate; many argue that in the long run, the price level absorbs all of the ad Justment To illustrate, assume that the demand for money takes the following form In M:=o+ a,In r +aln y, agIn Pt+E, where M is the nominal quantity of money demanded, r is the market interest rate, y is real income, P is the price level, In the natural logarithm operator, and E is a random error. The de- mand is specified in nominal terms and can be written in real terms only if a3 =1. The quantity of money demanded becomes observ able only in equilibrium when it equals the money supply(M) In formulating adjustments to disequilibrium, I develop a modification of the Fair-Jaffee(1972)quantitative method. They as- ume that the market price adjusts to the difference between the quantities demanded and supplied. That is =中(Q-Q;) re is the market price of Q, Qp manded and supplied, D is the first-difference operator, and p is the speed of adjustment. Thus, if o is greater (less)than o, then q rises(falls Osagie and Osayimwese(1981)discuss the ideas of disequilibrium in the money market and how the Fair-Jaifee(1972) technique can be used to estimate the money market. They also discuss the issue of what price to use for identifying disequilibria, but assume incorrectly that the short-side rule operates. Finally, they do not peStephen M. Miller quantity of money observed always falls on the money supply. Sec￾ond, no unique price of money exists from which market-disequi￾libria signals emanate. Rather, money-market disequilibria generate adjustments of varying degrees and with different timing in the in￾terest rate, real income, and the price level. If the monetary au￾thorities increase the money supply, then the economy holds too much money. Individuals reduce their holding of money by in￾creased spending on goods, services, and assets. If asset demands rise, then interest rates fall. If goods and service demands rise, then real income and the price level rise. A consensus exists on the tim￾ing of these effects; the interest rate adjusts first, followed in order by real income and the price level. As the price level finally ad￾justs, the interest rate and real income movements attenuate; many argue that in the long run, the price level absorbs all of the ad￾justment.4 To illustrate, assume that the demand for money takes the following form: ln My = u.,, + cwrln r, + cwzln yt + oaln P, + E, , (1) where MD is the nominal quantity of money demanded, r is the market interest rate, y is real income, P is the price level, In is the natural logarithm operator, and E is a random error. The de￾mand is specified in nominal terms and can be written in real terms only if o3 = 1. The quantity of money demanded becomes observ￾able only in equilibrium when it equals the money supply (MS). In formulating adjustments to disequilibrium, I develop a modification of the Fair-Jaffee (1972) quantitative method. They as￾sume that the market price adjusts to the difference between the quantities demanded and supplied. That is, where q is the market price of Q, QD and Q” are quantities de￾manded and supplied, D is the first-difference operator, and @ is the speed of adjustment. Thus, if Q” is greater (less) than QS, then q rises (falls). 40sagie and Osayimwese (1981) discuss the ideas of disequilibrium in the money market and how the Fair-JaEee (1972) technique can be used to estimate the money market. They also discuss the issue of what price to use for identifying disequilibria, but assume incorrectly that the short-side rule operates. Finally, they do not per￾form any econometric tests. 566