COUNTRY RISK AND BRAZILIAN ECONOMIC CYCLES POSTINFLATION TARGETING REGIME PERIOD

Abstract

This study analyzes the impact of the country risk shock on the Brazilian economic cycles in the post-inflation targeting regime period. We employed a SOE-RBC model as proposed by Schmitt-Grohé and Uribe (2003) modified to estimate parameters by means of Bayesian methods. The results suggest that the country risk shock
mainly explains the short-term oscillations of foreign debt and investment and a small part of the short-term oscillations of the capital stock, while the short-term oscillations of the other variables are explained by the productivity shock. It is considered that a positive shock in the country risk or possible downgrade by a rating agency would have a greater impact on investments and national external debt. However, there is ancimportant trade-off between the possible loss of autonomy and national sovereignty by the monetary authority when it conforms to the recommendations of evaluating or
supranational agencies that need further investigation.