The Brazilian Currency Turmoil of 2002: A Nonlinear Analysis

Abstract

This paper investigates the main sources of instability in Brazil during the currency and financial distress episode of 2002. We test for financial contagion from the Argentine crisis and the high yield market in developed countries as well as for political uncertainty arising from the Brazilian presidential elections and the expected victory of the left-wing candidate in that contest. Markov-switching time-varying transition-probability models, applied to high-frequency data, provide significant evidence for both interpretations, as well as for a strong impact of IMF intervention on Latin American Economics.

Keywords: Brazil, contagion, financial crises, IMF intervention, Markovswitching

JEL Classification: C11, C22, F32, F34, F42