Working Paper: NBER ID: w25256
Authors: Pablo A. Gluzmann; Martin M. Guzman; Joseph E. Stiglitz
Abstract: This paper makes two contributions. First, we examine the macroeconomic implications of Puerto Rico’s Fiscal Plan that was certified in March 2017 for fiscal years 2017-18 to 2026-27. Second, we perform a Debt Sustainability Analysis (DSA) that incorporates the expected macroeconomic dynamics implied by the Fiscal Plan in order to compute Puerto Rico’s debt restructuring needs. We detect a number of flawed assumptions in the Fiscal Plan that lead to an underestimation of its contractionary effects on the island’s economic activity. We conduct a sensitivity analysis of the expected macroeconomic dynamics implied by the plan that allows us to construct more realistic scenarios of Puerto Rico’s debt restructuring needs. We show that the island’s current debt position is unsustainable, and compute the necessary debt relief to restore sustainability under different sets of assumptions. The paper offers general insights for performing a macro-consistent DSA.
Keywords: Puerto Rico; Debt Sustainability; Fiscal Plan; Macroeconomic Dynamics; Debt Restructuring
JEL Codes: E61; E62; F34; H12; H63; H68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Economic growth (O00) |
| Economic growth (O00) | Debt sustainability (F34) |
| Flawed assumptions in fiscal plan (H69) | Underestimated contractionary effects on real GNP (E19) |
| Debt reduction (H63) | Debt sustainability (F34) |
| Implementation of GNP-linked bonds (H63) | Debt sustainability (F34) |
| Fiscal multipliers (E62) | Contractionary impacts of fiscal policies (E62) |
| Current debt position (H63) | Primary fiscal surpluses (H62) |