Municipal Bonds, Default, and Migration in General Equilibrium

Pablo Guerron and Grey Gordon

No 868, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: Bonds are an important source of funding for municipalities. As financing for big budget construction projects or surprise shortfalls in tax revenue, bonds help smooth tax burden across time. There is good reason for this smoothing: if residents feel their tax burden is excessive, they can migrate. The ability of residents to migrate significantly hampers the ability of local governments to raise taxes, and, in the extreme, can lead to default. We document the relationship between bonds, default, and migration in the data. We then construct an islands model that captures these facts while allowing for endogenous migration, taxation, debt issuance, and default. [TO BE DONE:] We assess the short run, long run, and welfare costs of default in our model and explore macro-prudential policies that can mitigate these costs.

Date: 2014
New Economics Papers: this item is included in nep-dge and nep-ure
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