What Is Recognition Lag?
Recognition lag is the time delay between when an economic shock, such as a 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.
- Recognition lag is the delay between when an economic shock occurs and when it is recognized by economists, central bankers, and the government.
- Delays occur because data documenting the state of the economy is not immediately available and then takes time to accurately analyze.
- On average, a recognition lag lasts between three and six months.
- Meanwhile, the entire process of identifying and remedying an economic problem can take anywhere between six months to three years, meaning issues are often addressed late.
Understanding Recognition Lag
Followers of the market will have noticed that economists often signal a recession a while after it actually begins. Recognition lags may be days, weeks or months, depending on the nature and severity of the economic shock or shift.
Recognition lags occur because it takes time to measure economic activity. Data documenting the state of the economy is not immediately available. It can take several months for important metrics to be collected and published, and then they must be analyzed and fully digested by the relevant shot callers.
On average, a recognition lag lasts between three and six months, and it is very difficult to reduce those timeframes because economic variables that track business cycles are reported either monthly or quarterly.
Moreover, monetary authorities may not react to reports immediately because initial estimates are often inaccurate or incomplete. Upward or downward movement in these figures are sometimes temporary, reversing during the next reporting period. This means additional time to correct, refine and interpret economic information is regularly required.
Example of Recognition Lag
During the great recession, it emerged that many European countries were saddled with huge government debts. Greece, in particular, was guilty of borrowing more money than it could make, although news of the country’s massive deficit did not come to light until 2010.
The recognition lag enabled the problem to spiral further out of control, putting at risk an entire continent and global trade flows.
Recognition Lag vs. Implementation Lag and Impact Lag
Recognition lag is studied in conjunction with other lags that follow it. They are:
- Implementation lag: the time it takes to implement a corrective fiscal or monetary policy response to an economic shock. Once they know what to do, a central bank authority is equipped to rapidly shift their policies. Policymakers usually meet every four to six weeks, although, 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: 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.
The entire process of identifying a problem, figuring out what action to take and then waiting for corrective measures to take effect can be a long one, spanning anywhere between six months to 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.