Political Uncertainty and the Peso Problem

Javier García-Fronti and Lei Zhang ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyses the relation between political uncertainty and the Peso Problem in emerging markets. Initially, it is assumed that the country has a hard peg system (the present government will never devalue). As for the political opposition, however, it is open to the possibility of leaving the fixed regime when it comes to power. Assuming that the change of government follows a Poisson distribution, our model shows that the expectations of a devaluation under the subsequent new government may drive up country risk premium under the first government. Sovereign spreads in Argentina in 2001 are used to illustrate the argument.

Keywords: Peso problem; political uncertainty (search for similar items in EconPapers)
JEL-codes: F31 F34 (search for similar items in EconPapers)
Date: 2006
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