Working Paper: CEPR ID: DP3785
Authors: Marcus Miller; Kannika Thampanishvong; Lei Zhang
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.
Keywords: Bayesian learning; Political risk; Sovereign spreads; Time consistency
JEL Codes: E61; E62; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contagion from Argentina (F65) | Brazilian sovereign spreads (F39) |
| domestic political fears surrounding left-wing candidate (D79) | Brazilian sovereign spreads (F39) |
| political uncertainty (D89) | Brazilian sovereign spreads (F39) |
| incoming administration's behavior (D73) | Brazilian sovereign spreads (F39) |
| IMF involvement (F33) | Brazilian sovereign spreads (F39) |
| political preferences (D72) | market expectations (D84) |