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Unsticking the Flypaper Effect in an Uncertain World

Carlos A. Vegh, Guillermo Vuletin

NBER Working Paper No. 21436
Issued in July 2015
NBER Program(s):The International Finance and Macroeconomics Program

We provide a novel explanation for the flypaper effect based on insurance arguments. In our model, the flypaper effect arises due to the differential response of precautionary savings to private income or fiscal transfers shocks in an uncertain world with incomplete markets. The model generates two testable implications: (i) the flypaper effect is a decreasing function of the correlation between fiscal transfers and private income, and (ii) such relationship is stronger the higher is the volatility of fiscal transfers and/or private income. An empirical analysis of Argentinean provinces for the period 1963-2006 finds strong support for the model's implications.

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Document Object Identifier (DOI): 10.3386/w21436

Published: Carlos A. Vegh & Guillermo Vuletin, 2015. "Unsticking the flypaper effect in an uncertain world," Journal of Public Economics, vol 131, pages 142-155. citation courtesy of

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