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Learning to Forget? Contagion and Political Risk in Brazil

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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.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 227.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:227

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

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References

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  1. Crippsss, Martin, 1991. "Learning rational expectations in a policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 297-315, April.
  2. Michael Spagat & Joao Mauricio Rosal, 2004. "Structural uncertainty and central bank conservatism: the ignorant should keep their eyes shut," Money Macro and Finance (MMF) Research Group Conference 2003 93, Money Macro and Finance Research Group.
  3. Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1996. "The Mexican peso crisis: Sudden death or death foretold?," Journal of International Economics, Elsevier, vol. 41(3-4), pages 265-283, November.
  4. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, 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.
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  7. Fratzscher, Marcel, 2002. "On currency crises and contagion," Working Paper Series 0139, European Central Bank.
  8. 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.
  9. 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.
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  14. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
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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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