Dr. Ryan Leary Discusses the Economic Impact of Sovereign Default Risk in a Recent IMF Economic Review Article

Senior Associate Dr. Ryan Leary coauthored “The Transmission of Quasi-Sovereign Default Risk: Evidence from Puerto Rico,” which was recently published in the International Monetary Fund’s Economic Review.

In the article, the authors – using the Puerto Rican debt crisis as a case study – present evidence for a novel mechanism where sovereign default risk affects the economy by driving fiscal austerity risk, especially for sensitive industries. Puerto Rico’s unique characteristics, including its status as a US territory, allow the authors to examine the transmission of quasi-sovereign default risk to the real economy. The authors show that an increase in the default risk of a government’s bonds will negatively affect the government’s borrowing capacity and ability to spend and that, in turn, industries that are more reliant on government demand for revenues will face a steeper employment decline because they perceive an increased risk of future austerity.

The full article is available below (behind paywall).