Response Lag

AAA

DEFINITION of 'Response Lag'

The time lag between when a corrective action is taken in the economy and when any changes coming from the action are noticed or felt. Corrective actions may be taken by the government directly, or more commonly by central banks or other mandated monetary authorities.

Also known as "impact lag", or the time it takes for the impact of corrective action to be felt by the economy.

INVESTOPEDIA EXPLAINS 'Response Lag'

If the economy is deemed to be running too hot or too cold, or a sudden shock occurs, there are three time lags to consider before the economy can properly adjust. The response lag occurs after the recognition lag (how long before the shock or shift is noticed) and the implementation lag (how long before corrective action is first taken).

When the Federal Reserve changes benchmark rates like the federal funds rate to shift the economy, it can take up to six months before the change integrates into the economy. Economists are well aware of the existence of multiple time lags in the modern economy, and adjust for this in their forecasts and calculations of future conditions.

RELATED TERMS
  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds ...
  2. Recognition Lag

    The time lag between when an actual economic shock, such as sudden ...
  3. Federal Reserve System - FRS

    The central bank of the United States. The Fed, as it is commonly ...
  4. Inflation

    The rate at which the general level of prices for goods and services ...
  5. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  6. Implementation Lag

    The time lag between when a macroeconomic shock or other adverse ...
Related Articles
  1. Currency Exchange: Floating Rate Vs. ...
    Forex Education

    Currency Exchange: Floating Rate Vs. ...

  2. What Are Central Banks?
    Personal Finance

    What Are Central Banks?

  3. How do central banks inject money into ...
    Investing

    How do central banks inject money into ...

  4. Economic Indicators To Know
    Retirement

    Economic Indicators To Know

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center