are monetary policies subjected to lag
The operation lag (or the effects lag) refers to the period of time between the adoption of monetary policy and the final effect of that policy on the economic activity. For analytical convenience, this lag is divided into the intermediate lag and the outside lag. Discretionary fiscal policy is subject to the same lags that we discussed for monetary policy. It takes some time for policy makers to realize that a recessionary or an inflationary gap exists—the recognition lag. This means that months pass before spending is affected. Monetary policy typically has a short policy lag (the time it takes to create and implement policy) and a long expenditure lag (the time it takes businesses and consumers to adjust to the new interest rates). The total lag time is usually 9-12 months and varies a good bit. Key Takeaways. 1  Discretionary fiscal policy involves the same kind of lags as monetary policy. 2  Expansionary fiscal policy may result in the crowding out of private investment and net exports, reducing the impact of the policy. 3  Supply-side economics stresses the use of fiscal policy to stimulate economic growth. Discretionary fiscal policy involves the same kind of lags as monetary policy. However, the implementation lag in fiscal policy is likely to be more pronounced, while the impact lag is likely to be less pronounced. The inside lag comprises the recognition lag (the time taken to recognize the shock) and the decision lag (the time taken to decide on and pursue a response). The inside lag is generally a more severe problem for fiscal policy (government spending and taxation policy) than for monetary policy. Policy lags arise because government actions are not instantaneous. The use of any stabilization policy encounters time lags between the onset of an economic problem, such as a business-cycle contraction or the onset of inflation, and the full impact of the policy designed to correct the problem. Time Lags. Monetary policy changes normally take a certain amount of time to have an effect on the economy. The time lag could span anywhere from nine months up to two years. Fiscal policy and its effects on output have a shorter time lag. When monetary policy attempts to stimulate the economy by lowering interest rates, it may take up to 18 months for evidence of any improvement in economic conditions to show up. Inside lag. In economics, the inside lag (or inside recognition and decision lag) is the amount of time it takes for a government or a central bank to respond to a shock in the economy. It is the delay in implementation of a fiscal policy or monetary policy. Meaning and Types of Lags in Monetary Policy: One of the limitations of monetary policy in countercyclical manner is the existence of time lags. It takes time for the monetary authority to realise the need for action and its recognition, and the taking of action and the effect of the action on economic activity.
Yes, monetary policy typically has a short policy lag and a long expenditure lag.