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A general equilibrium analysis of check float

  • James McAndrews
  • William Roberds

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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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 97-4.

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Date of creation: 1997
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Publication status: Published in Journal of Financial Intermediation, October 1999
Handle: RePEc:fip:fedawp:97-4
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  1. 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.
  2. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  3. 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.
  4. Jeffrey M. Lacker, 1997. "Clearing, settlement, and monetary policy," Working Paper 97-01, Federal Reserve Bank of Richmond.
  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. Charles M. Kahn & William Roberds, 1997. "Payment system settlement and bank incentives," Proceedings 537, Federal Reserve Bank of Chicago.
  7. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 101-115, August.
  8. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  9. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
  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. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12.
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