Working Paper

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

Abstract: 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 is far from sufficient for policy and incentives to perversely affect firm behavior. Three necessary conditions are identified for distorting behavior: storable output, diminishing returns, and a non-competitive output market. These conditions suggest that the estimated impacts of fiscal policies may be sensitive to underlying economic 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;

JEL Classification: E62; H20;

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2021-06-01

Number: 2021-15

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