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A general equilibrium analysis of check float

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  • James J. 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.

Suggested Citation

  • James J. McAndrews & William Roberds, 1999. "A general equilibrium analysis of check float," Staff Reports 84, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:84
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    References listed on IDEAS

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    Cited by:

    1. Tamás Ilyés & Lóránt Varga, 2015. "A General Equilibrium Approach of Retail Payments," MNB Working Papers 2015/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    2. Franklin Allen & James McAndrews & Philip Strahan, 2002. "E-Finance: An Introduction," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(1), pages 5-27, August.
    3. Simpson Prescott, Edward & Weinberg, John A., 2003. "Incentives, communication, and payment instruments," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 433-454, March.
    4. Tumen, Semih, 2012. "Regulation and the market for checks," Economic Modelling, Elsevier, vol. 29(3), pages 858-867.
    5. 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.
    6. Stephen F. Quinn & William Roberds, 2008. "The evolution of the check as a means of payment: a historical survey," Economic Review, Federal Reserve Bank of Atlanta.
    7. David B. Humphrey & Robert M. Hunt, 2012. "Getting rid of paper: savings from Check 21," Working Papers 12-12, Federal Reserve Bank of Philadelphia.

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    Keywords

    Check float ; Checks ; Econometric models;

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