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Learning to Forget? Contagion and Political Risk in Brazil

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  • Miller, Marcus
  • Thampanishvong, Kannika
  • Zhang, Lei

Abstract

We examine whether Brazilian sovereign spreads of over 20% 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3785.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3785

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Keywords: bayesian learning; political risk; sovereign spreads; time-consistency;

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References

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  1. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
  2. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," IDB Publications 6821, Inter-American Development Bank.
  3. Stephen Morris & Hyun Song Shin, 2000. "Rethinking Multiple Equilibria in Macroeconomic Modelling," Cowles Foundation Discussion Papers 1260, Cowles Foundation for Research in Economics, Yale University.
  4. Rosal, Joao Mauricio & Spagat, Michael, 2002. "Structural Uncertainty and Central Bank Conservatism: The Ignorant Should Keep Their Eyes Shut," CEPR Discussion Papers 3568, C.E.P.R. Discussion Papers.
  5. Carlo Ambrogio Favero & Francesco Giavazzi, . "Why are BrazilĀ“s Interest Rates so High?," Working Papers 224, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, vol. 113(487), pages 276-304, 04.
  7. Ellison, Martin & Valla, Natacha, 2001. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 153-171, August.
  8. Paul R. Masson, 1998. "Contagion," IMF Working Papers 98/142, International Monetary Fund.
  9. Driffill, John & Miller, Marcus, 1993. "Learning and Inflation Convergence in the ERM," Economic Journal, Royal Economic Society, vol. 103(417), pages 369-78, March.
  10. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," NBER Working Papers 5563, National Bureau of Economic Research, Inc.
  11. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  12. Crippsss, Martin, 1991. "Learning rational expectations in a policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 297-315, April.
  13. Marcel Fratzscher, 2003. "On currency crises and contagion," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(2), pages 109-129.
  14. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
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Cited by:
  1. Manuela Goretti, 2005. "The Brazilian Currency Turmoil of 2002: A Nonlinear Analysis," International Finance 0506001, EconWPA.

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