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Political Uncertainty and the Peso Problem

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  • Javier, Garcia-fronti
  • Lei, Zhang

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.

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File URL: http://mpra.ub.uni-muenchen.de/18246/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18246.

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Date of creation: 2006
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Handle: RePEc:pra:mprapa:18246

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Keywords: Peso problem; political uncertainty;

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  1. Alberto Alesina & Sule Ozler & Nouriel Roubini & Phillip Swagel, 1992. "Political Instability and Economic Growth," NBER Working Papers 4173, National Bureau of Economic Research, Inc.
  2. Gulcin Ozkan & Alan Sutherland, . "A Currency Crisis Model with an Optimising Policymaker," Discussion Papers 96/11, Department of Economics, University of York.
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