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.

RELATED TERMS
  1. Recognition Lag

    The time lag between when an actual economic shock, such as sudden ...
  2. Implementation Lag

    The time lag between when a macroeconomic shock or other adverse ...
  3. Lagging Indicator

    1. A measurable economic factor that changes after the economy ...
  4. Leads And Lags

    The alteration of normal payment or receipts in a foreign exchange ...
  5. Lagged Reserves

    A method of bank reserve calculation whereby the financial institution ...
  6. Autocorrelation

    A mathematical representation of the degree of similarity between ...
Related Articles
  1. Trading

    Exploring Oscillators and Indicators: Leading And Lagging Indicators

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com Indicators can be separated into two main types - leading and lagging - both differing in what they show users. Leading ...
  2. Markets

    A Look At Fiscal And Monetary Policy

    There's a debate over which policy is better for the economy. Find out which side of the fence you're on.
  3. ETFs & Mutual Funds

    Introduction To Coincident And Lagging Economic Indicators

    Investors can learn a lot, or very little, from these indicators once they know how to use them.
  4. Markets

    Fiscal Vs. Monetary Policy Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy and fiscal policy.
  5. Trading

    Understanding Corrections

    A correction is a reversal of at least 10 percent in the value of a stock, bond, commodity or index.
  6. Markets

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
  7. Markets

    Trading Around Key Options Indicators

    Learn the key economic indicators to help predict market movement.
  8. Markets

    Understanding The Consumer Confidence Index

    We look at this closely watched economic indicator to see what it means and how it's calculated.
  9. ETFs & Mutual Funds

    Global Bond ETFs to Date: 2016 Performance Review (BWX, WIP)

    Learn about the year-to-date performance of noteworthy global bond ETFs as of May 2016. Find out which of these ETFs beat the benchmark and which ones lagged.
  10. Markets

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
RELATED FAQS
  1. What are leading, lagging and coincident indicators? What are they for?

    An indicator is anything that can be used to predict future financial or economic trends. For example, the social and economic ... Read Answer >>
  2. How do government-issued stimulus checks affect the economy?

    Stimulus checks are payments given to individuals by the government based on taxes paid in the previous year. The hope is ... Read Answer >>
  3. Are exponential moving averages more effective than simple or weighted moving averages?

    Learn about different types of moving averages, as well as moving average crossovers, and understand how they are used in ... Read Answer >>
  4. What are the best technical indicators to complement the Force Index?

    Find out which technical tools pair best with the Force Index to generate and confirm trading signals, such as lagging indicators ... Read Answer >>
  5. What happens if interest rates increase too quickly?

    Learn about what happens if interest rates rise too fast and understand what goes into the Fed’s decision to adjust interest ... Read Answer >>
  6. What are some advantages of a market economy over other types of economies?

    Learn what a market economy is, the main assumption behind a market economy and some important advantages a market economy ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center