DISCUSSION OF“LIQUIDITY, MONEY CREATION AND DESTRUCTION, AND THE RETURNS TO BANKING” BY CAVALCANTI, EROSA, AND TEMZELIDES.

The article presents a microfounded approach to monetary theory, justified by the claim that we need a deeper understanding of the economic problem that money is solving to conduct a proper positive and normative analysis of monetary policy. The search-theoretic approach to monetary theory has proved a fruitful approach for studying a set of obstacles to barter exchange that give rise to a demand for money. As of yet, however, this approach has not gone far beyond existing, reduced-form models of the problems of cash management and noncash payment technologies. In the data, it appears that money, as traditionally defined, is rapidly disappearing from U.S. households' portfolios. The author speculates that innovation by banks in addressing these problems may be playing the key role in shaping the demand for money by U.S. households and lowering the costs of decentralized exchange. It appears that U.S. businesses and households are using a wide array of alternative payment mechanisms, each with its own costs and benefits, to accomplish a huge volume of transactions.