How do local government borrowing, default, and migration interact? We find in-migration results in excessive debt accumulation due to a key externality:
Immigrants help repay previously issued debt. In addition to providing direct evidence on this mechanism, we show cities are heavily indebted and remain so even after large population growth, resulting in boom defaults. While default rates are currently low, default risk has increased secularly despite the secular decline in interest rates, which we show lowered default risk else equal. Our quantitative model implies large interest rate declines in the Great Recession and COVID-19 crisis prevented default.