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.

Trading Center