Discussion paper

DP3785 Learning to Forget? Contagion and Political Risk in Brazil

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.


Miller, M and K Thampanishvong (eds) (2003), “DP3785 Learning to Forget? Contagion and Political Risk in Brazil”, CEPR Press Discussion Paper No. 3785. https://cepr.org/publications/dp3785