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A general equilibrium analysis of check float

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  • James McAndrews
  • William Roberds

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

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 84.

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Date of creation: 1999
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Handle: RePEc:fip:fednsr:84

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Related research

Keywords: Check float ; Checks ; Econometric models;

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References

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  1. 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.
  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. Scott Freeman, 1993. "Clearinghouse banks and banknote over-issue," Research Paper 9326, Federal Reserve Bank of Dallas.
  4. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
  5. 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.
  6. Lacker, Jeffrey M., 1997. "Clearing, settlement and monetary policy," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 347-381, October.
  7. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 687-715, November.
  8. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-70.
  9. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12.
  10. 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.
  11. William R. Emmons, 1995. "Interbank netting agreement and the distribution of bank default risk," Working Papers 1995-016, Federal Reserve Bank of St. Louis.
  12. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
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Cited by:
  1. Tumen, Semih, 2012. "Regulation and the market for checks," Economic Modelling, Elsevier, vol. 29(3), pages 858-867.
  2. David B. Humphrey & Robert Hunt, 2012. "Getting rid of paper: savings from Check 21," Working Papers 12-12, Federal Reserve Bank of Philadelphia.
  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. Edward S. Prescott & John A. Weinberg, 2000. "Incentives, communication, and payment instruments," Working Paper 00-11, Federal Reserve Bank of Richmond.
  5. Franklin Allen & James McAndrews & Philip Strahan, 2001. "E-Finance: An Introduction," Center for Financial Institutions Working Papers 01-36, Wharton School Center for Financial Institutions, University of Pennsylvania.
  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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