Asset Price Inflation and Monetary Policy

ANNA J. SCHWARTZ

It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders' portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.; Atlantic Econ. J., 31(1): pp. 1-15, Mar. 03. ©All Rights Reserved.

The Euro and its Consequences: What Makes a Currency Strong?

HELMUT FRISCH

The creation of the Economic and Monetary Union (EMU) and the introduction of the euro was one of the great events in economic history after World War II. The basic attractiveness of the euro is its large and expanding transaction size and the independent central bank which pursues price stability as its primary goal. The basic strength of the dollar is the hysteresis effect based on economies of scale and network externalities. The conclusion in the paper is that at present the hysteresis effect dominates the sheer size effect and the dollar remains the key vehicle currency while the euro has established itself as the second most widely used currency in the world. The euro depreciated against the dollar in the first three years after its introduction. In the paper the euro weakness is explained by the positive growth differential in favor of the U.S. economy caused by the advance in IC-technology and a pick-up in total factor productivity. In the medium run, the outlook for the euro is favorable. The U.S. current account deficit is unsustainable and improvements require a substantial depreciation of the dollar. (JEL G15, F02, F33, E52, E58); Atlantic Econ. J., 31(1): pp. 15-31, Mar. 03. ©All Rights Reserved.

Reputation Deals: A Theory of Endogenous Teams

GUNTHER LANG

This paper complements the traditional theory of teams [Fama, 1980; Holmstrom, 1982a, 1982b] by introducing endogenous team formation by agents who are concerned with their reputations and are informed about the types of their potential teammates. Such a constellation leads to a tradeoff between joining a high-productivity type but a low-reputation partner. Gains from trade are analyzed, both, for the case of non-transferable and transferable utility, and the lessons are discussed that can be learned from observing reputation deals. Finally a signaling model of teaming is developed that captures in a fully rational way the process of information acquisition by the agents' strategic opponent: the market. (JEL C72, C78, L14, L23); Atlantic Econ. J., 31(1): pp. 32-50, Mar. 03. ©All Rights Reserved.

The Relationships Between Political Support, Party Strength, and Term Limits

SUZANNE CLAIN AND WEN MAO

This paper translates two implications of a recent game-theoretical explanation for term limitations [Mao, 2001] into an empirical context for testing. One implication involves the pattern of political support for a candidate over time and its relationship to the strength of the candidate's party. To test this implication, this study focuses on the careers of senators of the 106^{th} Congress and applies a suitable regression analysis. Consistent with Mao's theory, the statistical evidence suggests that the greater the strength of the candidate's party, the longer it takes for the politician's support to spread beyond his or her party. A second implication pertains to the effect of the majority party's strength on the likelihood of term limit legislation being passed. To test this implication, the study focuses on the states' stances on federal term limits, prior to 1995, and applies a probit analysis. In this case, the statistical evidence suggests that the greater the strength of the majority party, the less likely the state to have passed federal term limit legislation. The relationship is not statistically significant by conventional standards, though it is nearly so. However, taken together, these empirical results are generally supportive of Mao [2001]. (JEL D72); Atlantic Econ. J., 31(1): pp. 51-61, Mar. 03. ©All Rights Reserved.

The Impact of Safety Regulations on Externalities

THOMAS L. TRAYNOR

Empirical analyses of product safety regulations have indicated that such regulations induce compensating behavior (also known as offsetting behavior) by the users of products that pose risks to their health. Many of these analyses conclude that such compensating behavior causes externalities to rise. In such cases, regulations reduce the loss suffered by the user of the good when a harmful event occurs, encouraging a moral hazard response which creates externalities for others. Other studies find that although compensating behavior mitigates the beneficial impact of safety regulations, such externalities do not rise. This paper presents a model suggesting that although compensating behavior always occurs in response to product safety regulations, a dichotomy exists wherein regulations engineered to reduce the typical loss suffered by individuals per accident (or loss event) will increase externalities, while regulations engineered to reduce the number of accidents (or loss events) will reduce externalities. (JEL K32, D81); Atlantic Econ. J., 31(1): pp. 62-70, Mar. 03. ©All Rights Reserved.