Fiscal Foresight and Perverse Distortions to Firm Behavior: Anticipatory Dips and Compensating Rebounds

Bob Chirinko and Daniel Wilson

No 2021-15, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We study the conditions under which fiscal foresight – forward-looking agents anticipating future policy changes – results in perverse economic behavior through unintended intertemporal tradeoffs. Somewhat surprisingly, fiscal foresight by itself is far from sufficient for policy-induced incentives to perversely distort firm behavior. Rather, we show that there are two additional sets of conditions, at least one of which must hold to generate perverse behavior: (i) storable output, diminishing returns, and a non- competitive output market; (ii) “rolling base” policy design and storable output. These conditions suggest that the estimated impacts of fiscal policies may be sensitive to underlying economic or legislative characteristics and that policies targeted to specific firms or industries with unique characteristics may not be generalizable.

Keywords: Fiscal foresight; intertemporal tradeoffs; real distortions; fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 H20 (search for similar items in EconPapers)
Pages: 34
Date: 2023-03-01
New Economics Papers: this item is included in nep-mac
Note: The first version of this paper was published June 1, 2021, as "Fiscal Foresight and Real Distortions to Firm Behavior: Anticipatory Dips and Compensating Rebounds."
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Working Paper: Fiscal Foresight and Perverse Distortions to Firm Behavior: Anticipatory Dips and Compensating Rebounds (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:92841

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DOI: 10.24148/wp2021-15

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