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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 U.S. prefer to use check payment over less costly, electronic means of payment. Earlier studies have focused on check “float,” i.e., 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 need not act as a 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 distorting tax. Consistent with earlier studies, we show that float can also lead to inefficiencies if banks engage in costly activities designed to accelerate check presentment. ; Our analysis is consistent with view that float is a significant factor behind the continued popularity of check payment. Our analysis 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. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
  2. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  3. 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, Federal Reserve Bank of Minneapolis, issue Spr, pages 18-29.
  4. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12.
  5. Casey B. Mulligan & Xavier X. Sala-i-Martin, 1997. "The Optimum Quantity of Money: Theory and Evidence," NBER Working Papers 5954, National Bureau of Economic Research, Inc.
  6. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  7. Jeffrey M. Lacker, 1997. "Clearing, settlement, and monetary policy," Working Paper, Federal Reserve Bank of Richmond 97-01, Federal Reserve Bank of Richmond.
  8. William R. Emmons, 1995. "Interbank netting agreement and the distribution of bank default risk," Working Papers 1995-016, Federal Reserve Bank of St. Louis.
  9. Charles M. Kahn & William Roberds, 1996. "Payment system settlement and bank incentives," Working Paper, Federal Reserve Bank of Atlanta 96-10, Federal Reserve Bank of Atlanta.
  10. James B. Bullard & Steven Russell, 2004. "How costly is sustained low inflation for the U.S. economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-68.
  11. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(1), pages 101-115, August.
  12. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 18(2), pages 203-20, April.
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Cited by:
  1. David B. Humphrey & Robert Hunt, 2012. "Getting rid of paper: savings from Check 21," Working Papers 12-12, Federal Reserve Bank of Philadelphia.
  2. Tumen, Semih, 2012. "Regulation and the market for checks," Economic Modelling, Elsevier, vol. 29(3), pages 858-867.
  3. 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.
  4. 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.
  5. Franklin Allen & James McAndrews & Philip Strahan, 2002. "E-Finance: An Introduction," Journal of Financial Services Research, Springer, vol. 22(1), pages 5-27, August.
  6. Edward S. Prescott & John A. Weinberg, 2000. "Incentives, communication, and payment instruments," Working Paper, Federal Reserve Bank of Richmond 00-11, Federal Reserve Bank of Richmond.

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