Learning to Forget? Contagion and Political Risk in Brazil

Marcus Miller (), Kannika Thampanishvong and Lei Zhang ()

No 3785, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: bayesian learning; political risk; sovereign spreads; time-consistency (search for similar items in EconPapers)
JEL-codes: E61 E62 F34 (search for similar items in EconPapers)
Date: 2003-02
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