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Federal Reserve Bank of Richmond
Working Paper
On Regional Borrowing, Default, and Migration
Grey Gordon
Pablo Guerron-Quintana
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.


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Grey Gordon & Pablo Guerron-Quintana, On Regional Borrowing, Default, and Migration, Federal Reserve Bank of Richmond, Working Paper 19-4, 12 Feb 2019.
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Keywords: migration; cities
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