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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Citations: View citations in EconPapers (5)

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Working Paper: Learning to Forget? Contagion and Political Risk in Brazil (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:ac2003:227

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