DP3785 Learning to Forget? Contagion and Political Risk in Brazil
|Author(s):||Marcus Miller, Kannika Thampanishvong, Lei Zhang|
|Publication Date:||February 2003|
|Keyword(s):||bayesian learning, political risk, sovereign spreads, time-consistency|
|JEL(s):||E61, E62, F34|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3785|
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.