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.