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On Regional Borrowing, Default, and Migration

Grey Gordon and Pablo Guerron

No 19-4, Working Paper from Federal Reserve Bank of Richmond

Abstract: Migration plays a key role in city finances with every new entrant reducing debt per person and every exit increasing it. We study the interactions between regional borrowing, migration, and default from empirical, theoretical, and quantitative perspectives. Empirically, we document that in-migration rates are positively correlated with deficits, that many cities appear to be at or near state-imposed borrowing limits, and that defaults can occur after booms or busts in productivity and population. Theoretically, we show that migration creates an externality that results in over-borrowing, and our quantitative model is able to rationalize many features of the data because of it. Counterfactuals reveal (1) Detroit should have deleveraged in the financial crisis to avoid default; (2) a return to the high-interest rate environment prevailing in the 1990s has only small long-run effects on city finances; and (3) anticipated bailouts double default rates.

Keywords: migration; cities (search for similar items in EconPapers)
JEL-codes: E21 F22 F34 R23 R51 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2019-02-12
New Economics Papers: this item is included in nep-mac, nep-mig and nep-ure
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