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A General Equilibrium Analysis of Check Float

  • McAndrews, James
  • Roberds, William

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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  1. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  2. 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.
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  8. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  9. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  10. William R. Emmons, 1995. "Interbank netting agreement and the distribution of bank default risk," Working Papers 1995-016, Federal Reserve Bank of St. Louis.
  11. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12.
  12. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
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