Working Papers

2021-15 | July 2022

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

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We study the conditions under which fiscal foresight – forward-looking agents anticipating future policy changes – distorts economic behavior through undesired intertemporal tradeoffs. Somewhat surprisingly, fiscal foresight by itself is far from sufficient for policy and incentives to perversely affect firm behavior. Rather, we show that there are two additional sets of conditions, at least one of which must hold to generate distorting behavior (i) storable output, diminishing returns, and a non-competitive output market; or (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.

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Article Citation

Chirinko, Robert S, and Daniel J. Wilson. 2021. "Fiscal Foresight and Real Distortions to Firm Behavior: Anticipatory Dips and Compensating Rebounds," Federal Reserve Bank of San Francisco Working Paper 2021-15. Available at https://doi.org/10.24148/wp2021-15