On Regional Borrowing, Default, and Migration

67 Pages Posted: 13 Feb 2019 Last revised: 29 Apr 2020

See all articles by Grey Gordon

Grey Gordon

Federal Reserve Banks - Federal Reserve Bank of Richmond

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: 2019-02-12

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

JEL Classification: E21, F22, F34, R23, R51

Suggested Citation

Gordon, Grey and Guerron-Quintana, Pablo, On Regional Borrowing, Default, and Migration (2019-02-12). FRB Richmond Working Paper No. 19-4, Available at SSRN: https://ssrn.com/abstract=3333605

Grey Gordon (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Pablo Guerron-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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