Institutional Affiliation: University of North Carolina at Chapel Hill
NBER Working Papers and Publications
|December 2017||The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico|
with Anusha Chari, Toan Phan: w24108
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 measur...