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A general equilibrium analysis of check float

  • James J. McAndrews
  • William Roberds

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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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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  1. Lacker, Jeffrey M., 1997. "Clearing, settlement and monetary policy," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 347-381, October.
  2. 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.
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  8. Marco A. Espinosa-Vega & Steven Russell, 1998. "The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model," FRB Atlanta Working Paper 98-6, Federal Reserve Bank of Atlanta.
  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. James B. 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.
  12. David B. Humphrey & Lawrence B. Pulley & Jukka M. Vesala, 1996. "Cash, paper, and electronic payments: a cross-country analysis," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 914-941.
  13. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  14. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
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  16. Humphrey, David B & Pulley, Lawrence B & Vesala, Jukka M, 1996. "Cash, Paper, and Electronic Payments: A Cross-Country Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 914-39, November.
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