The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Anusha Chari, Ryan Leary and Toan Phan

No 24108, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Puerto Rico’s unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth declines in government demand and external finance dependent industries. An additional real effect of default anticipation is that heightened default risk Granger causes Puerto Rico’s austerity measures. An event study analysis using government bond yields and stock returns confirms that news of increased default risk increases the cost of capital for the Puerto Rican government and for publicly traded Puerto Rican firms.

JEL-codes: F3 F4 G15 H2 H3 (search for similar items in EconPapers)
Date: 2017-12
Note: AP CF EFG IFM ME PE
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Citations: View citations in EconPapers (11)

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Working Paper: The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico (2018)
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