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Working Papers

February 2018, No. 18-03

The Transmission of Quasi-Sovereign Default Risk: Evidence from Puerto Rico (Revised September 2018)

Anusha Chari, Ryan Leary and Toan Phan

Puerto Rico's unique characteristics as a U.S. territory allow us to examine the transmission of quasi-sovereign default risk to the real economy. We document a negative relationship between increased default probabilities and employment growth in government-demand-dependent industries. The negative relationship strengthens when the government undertakes austerity measures. In addition, fiscal austerity reduces output growth via a local fiscal multiplier effect. Overall, we provide evidence for a novel demand-driven transmission mechanism of sovereign default risk that operates through austerity risk and government demand dependence.

 

*This paper was previously published under the title "The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico."

DOI: https://doi.org/10.21144/wp18-03

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