Learning to Forget? Contagion and Political Risk in Brazil

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

No 227, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: We examine whether Brazilian sovereign spreads of over 20 percent 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: sovereign spreads; political risk; Bayesian learning; time-consistency (search for similar items in EconPapers)
JEL-codes: E61 E62 F34 (search for similar items in EconPapers)
Date: 2003-06-04
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Working Paper: Learning to Forget? Contagion and Political Risk in Brazil (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:ecj:ac2003:227

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