Risco-Brasil: The Lula Effect and the Central Bank Effects

This short paper discusses the behavior of Brazil’s sovereign risk spread, since the adoption of a floating exchange rate regime in the beginning of 1999. The data presented seem to support the hypothesis of perverse effects of domestic monetary policy on country-risk. On the other hand, fears of a future debt default - sparked by volatile presidential election polls - do not seem to explain a significant part of the risk spread, until very recently. The author is fully aware of the existence of a rich and fast-growing literature on country-risk. This paper is not an attempt to add new pieces of theory or rigorous analytical evidence to that literature; its sole aim is to make a small contribution to the debate, by pointing at some usually neglected factors that may explain Brazil’s sovereign risk spread.

KEYWORDS:
Brazil risk; monetary policy; public debt