The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.
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.