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A General Equilibrium Analysis of Check Float

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  • McAndrews, James
  • Roberds, William

Abstract

Households and businesses in the United States prefer to use check payment over less costly, electronic means of payment. Earlier studies have focused on check "float," that is, the time lag between receipt and clearing, as a potential explanation for the continued popularity of checks. An underlying assumption of these studies is that check float operates as a pure transfer from payee to payor. We construct a simple general equilibrium model in which payments are made by check. In general equilibrium, check float does not act as a pure transfer. If float can be priced into market transactions, then it has no effect on equilibrium allocations. If float is not priced into market transactions, then it acts as a distorting tax. Our results are consistent with the view that float is a significant factor behind the continued popularity of check payment. Our results are also consistent with recent data that indicate that the average value of float (per check) is small.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 8 (1999)
Issue (Month): 4 (October)
Pages: 353-377

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Handle: RePEc:eee:jfinin:v:8:y:1999:i:4:p:353-377

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Web page: http://www.elsevier.com/locate/inca/622875

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References

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  1. Green, Edward-J, 1997. "Money and Debt in the Structure of Payments," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(1), pages 63-87, May.
  2. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  3. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12.
  4. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  5. Casey B. Mulligan & Xavier X. Sala-i-Martin & Frederic S. Mishkin & Jonas D. M. Fisher, 1997. "The optimum quantity of money: theory and evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 687-724.
  6. James Bullard & Steven Russell, 1998. "How costly is sustained low inflation for the U.S. economy?," Working Papers 1997-012, Federal Reserve Bank of St. Louis.
  7. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 101-115, August.
  8. Charles M. Kahn & William Roberds, 1997. "Payment system settlement and bank incentives," Proceedings 537, Federal Reserve Bank of Chicago.
  9. William R. Emmons, 1995. "Interbank netting agreement and the distribution of bank default risk," Working Papers 1995-016, Federal Reserve Bank of St. Louis.
  10. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
  11. James N. Duprey & Clarence W. Nelson, 1986. "A visible hand: the Fed's involvement in the check payments system," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 18-29.
  12. Jeffrey M. Lacker, 1997. "Clearing, settlement, and monetary policy," Working Paper 97-01, Federal Reserve Bank of Richmond.
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Cited by:
  1. Edward S. Prescott & John A. Weinberg, 2000. "Incentives, communication, and payment instruments," Working Paper 00-11, Federal Reserve Bank of Richmond.
  2. Franklin Allen & James McAndrews & Philip Strahan, 2002. "E-Finance: An Introduction," Journal of Financial Services Research, Springer, vol. 22(1), pages 5-27, August.
  3. Stephen Quinn & William Roberds, 2008. "The evolution of the check as a means of payment: a historical survey," Economic Review, Federal Reserve Bank of Atlanta.
  4. Semih Tumen, 2010. "Regulation and the Market for Checks (Duzenlemeler ve Cek Piyasasi)," Working Papers 1006, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  5. David B. Humphrey & Robert Hunt, 2012. "Getting rid of paper: savings from Check 21," Working Papers 12-12, Federal Reserve Bank of Philadelphia.
  6. Semih Tumen, 2012. "Regulating Check Use in Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 12(1), pages 1-12.

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