Do Intergovernmental Financial Transfers Have an Effect Upon Municipal Borrowing? Subsequent Effect of Flypaper Theory in Municipalities in Turkey
The postulate that intergovernmental financial transfers affect the increase in local government spending more
than the own revenues do is taken as flypaper effect. If so, then a municipality, for instance, is expected to spend morenot
because of the increase in its own revenue sources but because the increase in financial transfers received from higher level
authority. However, municipalities have also borrowing option to finance their own expenditures. Thus the present threefold
relation between transfers, own revenues and expenditures need to be enhanced by borrowing. In the past decade, the
borrowing amount of municipalities in Turkey have distinguishably leaped up higher levels, whereas grants from central
government also rises.This study examines whether a causality exists between the growth of intergovernmental financial
transfers and of borrowing in municipalities in Turkey. The results in our estimation presents that there is a long runcausality
in both financial sources. From a different view, the flypaper effect triggers the borrowing of municipalities in Turkey.
Keywords— Intergovernmental Financial Transfers, Municipal Borrowing, Flypaper Effect.