Political Uncertainty and the Peso Problem

Javier, Garcia-fronti and Lei, Zhang (2006): Political Uncertainty and the Peso Problem.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Peso problem;political uncertainty
• Subjects: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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