Monetary policy lags are the delay between the onset of an economic issue and government action to address it. The means of transmission, such as raising interest rates, can contribute to delays in implementation. Lags can last until consumers slow down consumption and investment responds to the policy.
Just as the name suggests, monetary policy lags are the length of time that can occur between the onset of an undesirable economic condition and actual government action to address it, as well as the time it takes for actions to be taken by the government or central bank to take hold. In this sense, monetary policy lags refer to the time that could have elapsed between the time monetary policy was introduced and the actual time it takes for that policy to start taking effect in the economy. Monetary policies refer to the policies used by the central bank to control undesirable economic conditions in the economy, including slow growth and inflation. When monetary policies have been introduced, such as raising interest rates, some factors such as the means of transmission can contribute to causing a delay in its implementation.
One of the factors contributing to monetary policy lags is the means of transmission of monetary policy to the economy. Assuming that the goal of monetary policy is to curb rising inflation, the central bank may decide to raise interest rates, in which case other banks in the economy will be the main vehicles for monetary policy transmission. If the central bank raises interest rates, other banks will reciprocate by also raising their own interest rates and other financial transaction charges. It will also manifest itself in the way these banks place more restrictions on issuing loans to consumers.
Since the central bank’s goal is to reduce consumption which is the cause of inflation, the sign of lags in monetary policy here is the time between when the central bank first implemented the policy and when in which it actually started to take effect. The desired effect in this case is to slow down consumption. As such, monetary policy lags last until consumers really begin to slow down the pace of their consumption of goods and services. Another source of lag in monetary policy is a consequence of the time it takes for investment by consumers and businesses to show any kind of appreciable response to the ongoing monetary policy. Basically, the lag in monetary policy is usually the result of various adjustments by different sectors of the economy to the new monetary policy.
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