A general equilibrium analysis of check float

Description

"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"--Federal Reserve Bank of New York web site.

Subjects

Series Statement

• Staff reports ;
• no. 84
• Staff reports (Federal Reserve Bank of New York : Online) ;

Links

• http://www.ny.frb.org/research/staff_reports/sr84.html
• URL