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Discussion Paper Details

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Title: Learning to Forget? Contagion and Political Risk in Brazil

Author(s): Marcus Miller, Kannika Thampanishvong and Lei Zhang

Publication Date: February 2003

Keyword(s): bayesian learning, political risk, sovereign spreads and time-consistency

Programme Area(s): International Macroeconomics

Abstract: We examine whether Brazilian sovereign spreads of over 20% in 2002 could be due to contagion from Argentina or to domestic politics, or both. Treating unilateral debt restructuring as a policy variable gives rise to the possibility of self-fulfilling crisis, which can be triggered by contagion. We explore an alternative political-economy explanation of panic in financial markets inspired by Alesina (1987), which stresses exaggerated market fears of an untried Left-wing candidate. To account for the fall of sovereign spreads since the election, we employ a model of Bayesian learning and analyse the effects of contagion and IMF commitments.

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Bibliographic Reference

Miller, M, Thampanishvong, K and Zhang, L. 2003. 'Learning to Forget? Contagion and Political Risk in Brazil'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3785