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

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

No 110, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: 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 and government demand dependence.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:110

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