The Transmission of Quasi-Sovereign Default Risk: Evidence from Puerto Rico

Anusha Chari (), Ryan Leary () and Toan Phan ()
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Anusha Chari: University of North Carolina at Chapel Hill & NBER
Ryan Leary: The Brattle Group
Toan Phan: Federal Reserve Bank of Richmond

IMF Economic Review, 2025, vol. 73, issue 2, No 6, 556-595

Abstract: Abstract Puerto Rico’s unique characteristics as a US territory allow us to examine the transmission of quasi-sovereign default risk to the real economy. Increased default probabilities predict a significant decline in monthly employment growth in government-demand-dependent industries. The relationship between increased default risk and declining employment growth further strengthens when the government undertakes austerity measures. In addition, fiscal austerity reduces output growth via a local fiscal multiplier effect. Overall, the paper presents evidence for a novel demand-driven transmission mechanism where sovereign default risk operates through austerity risk and government demand dependence.

JEL-codes: F3 F4 G15 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41308-023-00233-8

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