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

Author

Listed:
  • Anusha Chari

    (University of North Carolina at Chapel Hill & NBER)

  • Ryan Leary

    (The Brattle Group)

  • Toan Phan

    (Federal Reserve Bank of Richmond)

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.

Suggested Citation

  • Anusha Chari & Ryan Leary & Toan Phan, 2025. "The Transmission of Quasi-Sovereign Default Risk: Evidence from Puerto Rico," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 73(2), pages 556-595, June.
    • Handle: RePEc:pal:imfecr:v:73:y:2025:i:2:d:10.1057_s41308-023-00233-8
    DOI: 10.1057/s41308-023-00233-8
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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