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Learning to Forget? Contagion and Political Risk in Brazil

Author

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  • Zhang, Lei

    (University of Warwick)

  • Marcus Miller
  • Kannika Thampanishvong

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.

Suggested Citation

  • Zhang, Lei & Marcus Miller & Kannika Thampanishvong, 2003. "Learning to Forget? Contagion and Political Risk in Brazil," Royal Economic Society Annual Conference 2003 227, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:227
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    Cited by:

    1. Manuela Goretti, 2005. "The Brazilian currency turmoil of 2002: a nonlinear analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 289-306.
    2. Irma Alonso & Luis Molina, 2021. "A GPS navigator to monitor risks in emerging economies: the vulnerability dashboard," Occasional Papers 2111, Banco de España.
    3. Roberto Rigobón, 2019. "Contagion, Spillover, and Interdependence," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 69-99, April.
    4. Mpoha, Salifya & Bonga-Bonga, Lumengo, 2021. "Spillover effects from China and the US to global emerging markets: a dynamic analysis," MPRA Paper 109349, University Library of Munich, Germany.

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    More about this item

    Keywords

    sovereign spreads; political risk; Bayesian learning; time-consistency;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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