DEFINITION of Implementation Lag
Implementation lag is the delay between an adverse macroeconomic event and the implementation of a corrective fiscal or monetary policy response by the government and central bank.
BREAKING DOWN Implementation Lag
There is always an implementation lag after a macroeconomic surprise. For one thing, policymakers may not even realize there is a problem, because of data lag. A lot of economic data is not published for a month or a quarter after the period it applies to. Even then, these lagging indicators may be subject to successive revisions. GDP data, for example, is notoriously unreliable when first published, which is why the Bureau of Economic Analysis warns that its estimates are informative, but never really final.
For an advance warning of economic threats, policymakers look at leading indicators, like surveys of business confidence, and bond and stock market indicators – like the yield curve but economists and policymakers still have to wait to see if these predictions come true. Then, because of recognition lag, it may take months or years before politicians recognize there has been an economic shock or structural change in the economy. No politician is going to acknowledge there is a chance of a recession until they are in the middle of one.
Central bankers, economists and politicians then have to deliberate over the right response before they implement policy changes. The right policies will not necessarily be obvious, even to economists. And politicians, who naturally have political rather than economic objectives, like to pass the buck. Good economics – like preventing massive asset bubbles that will devastate the economy when they burst — often make bad politics. This is why the relationship between economics and politics leads to so many policy blunders, and why monetary policy so often ends up being procyclical and destabilizing rather than being countercyclical and helping to smooth out the economic cycle.
Even when economists and politicians are on the same page, there will still be a response lag, before any monetary or fiscal policy action has an impact on the economy. As quantitative easing has shown, it can take years before monetary policy has any real effect on the economy – as is the case when central banks push on a string and tax cuts can take years to have a verifiable impact.