What is Recognition Lag

Recognition lag is the time lag between when an actual economic shock, such as sudden boom or bust occurs, and when it is recognized by economists, central bankers and the government. The recognition lag is studied in conjunction with implementation lag and response lag, two other measures of time lags within an economy.

BREAKING DOWN Recognition Lag

Recognition lags may be days, weeks or months, depending on the nature and severity of the economic shock or shift. Followers of the market are familiar with the phenomenon of when economists signal a recession in the economy several months after it has actually begun. This is because it can take several months for data metrics that are studied to predict economic shifts to be aggregated and published for the investing public.

On average, recognition lag lasts between three and six months, and it's very difficult to reduce those timeframes due to the fact that economic variables that track business cycles are reported either monthly or quarterly. Monetary authorities may not react to those reports immediately because initial estimates are often inaccurate or incomplete. This necessitates additional time to correct, refine and interpret the economic information. Upward or downward movement in these figures are often temporary and are reversed during the next reporting period.

Recognition Lag vs. Implementation Lag and Impact Lag

By contrast, implementation lag is the time required for a central bank to consider and react to new economic information. However, once they know what to do, a central bank authority is equipped to rapidly shift their policies because they usually meet every four to six weeks. In the event of an emergency, central banks can act even faster by calling an emergency meeting or even crafting policy via telephone and email without actually convening in person.

Impact lag is the period between when monetary authorities change policy and when it takes full effect. This can potentially be the longest and most variable economic lag, lasting from three months to two years.

As as result of the various lags involved with making monetary policy, the time between when a change in economic activity happens and the revised monetary policy taking effect can be anywhere between six months and three years. By that time, a country might be in a completely different economic condition. The long lags can seriously hamper an active economy that might have recovered on its own and is currently facing a whole different set of pressures.