Learning to Forget? Contagion and Political Risk in Brazil
Marcus Miller, Kannika Thampanishvong, Lei Zhang
February 2003
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
JEL Classifications: E61, E62, F34.
Address for correspondence
Marcus Miller, CEPR Kannika Thampanishvong
Department of Economics Department of Economics
Warwick University Warwick University
Coventry, CV4 7AL Coventry, CV4 7AL
E-mail: Marcus.Miller@warwick.ac.uk E-mail: K.Thampanishvong@warwick.ac.uk
Tel. ( 44 203) 523 049
Lei Zhang
Department of Economics
Warwick University
Coventry, CV4 7AL
E-mail: ecrsm@warwick.ac.uk
