An empirical model of the Brazilian country risk -- an extension of the beta country risk model

Abstract

This paper develops a statistical model to study the Brazilian country risk using a country beta model in the spirit of Harvey and Zhou (1993), Erb et al. (1996a, b) and Gangemi et al. (2000). Specifically, the impact of macroeconomic variables is analysed using a time-varying parameter approach. An extension of the original model is applied in order to verify the parameters' stability over time. It is found that monetary policy had a significant and stable impact on Brazil's country risk and international reserves presented a significant impact only during the fixed exchange rate period.

Notes

¹ In this sense, the highly indexed Brazilian debt is among the main reasons for the weak fundamentals and fragile sustainability of public debt. In December 2002, for example, SELIC-indexed debt and dollar-denominated debt accounted for 63% and 22% of Brazilian total debt.

² The ratio of private foreign debt to the total foreign debt in 2002 was 43.57% according to IPEA-DATA.

³ In the model, the IBOVESPA index was used as the returns of domestic equities, while the Dow Jones index was used as the returns of the rest of the world's equities.

⁴ The variable GOV presents some negative values and that is the reason why it is not in log. To facilitate the comparison the variable FGE is taken in level too. The results will not vary if FGE is taken in log.

⁵ The lack of significance of the OIL variable maybe due to the interference of the Brazilian government in the domestic oil prices.

⁶ It is important to note that the interest rate can have an unstabilizing effect on the sustainability of the public sector and, as such, induce an increase in the country risk. The evidence presented in this paper can be considered a favourable result with regard to the traditional role of liquidity tightening of the monetary policy.