for helpful discussions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve Bank of Richmond or the Federal Reserve System. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
for helpful discussions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve Bank of Richmond or the Federal Reserve System. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
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 risk and government demand dependence.
This chapter presents a case study that investigates the pricing of key contract provisions in Puerto Rican debt. It contributes to a body of research that asks whether investors price contract provisions and, if so, whether the pricing varies with credit risk. Contract provisions across different types of Puerto Rican bonds contain multiple sources of variation. Specifically, the chapter examines investor pricing of three key legal provisions of Puerto Rican debt; general obligation debt versus the secured bonds issued by the Puerto Rico Sales Tax Financing Corporation; debt issued under New York law versus Puerto Rican law; and finally impact of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) which retroactively enacted collective action clauses for Puerto Rican debt. In each instance, we find evidence consistent with the hypothesis that investors value specific contract provisions and legal protections and more so when credit risk is high, and restructuring becomes likely.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.