Response Lag


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.

BREAKING DOWN '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.

  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Inflation

    The rate at which the general level of prices for goods and services ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds ...
  4. Implementation Lag

    The time lag between when a macroeconomic shock or other adverse ...
  5. Recognition Lag

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

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