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Top 5 Types of Lags in the Monetary Policy

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The following points highlight the top five types of lags in the Monetary Policy. The Lags are: 1. Data lag 2. Recognition lag 3. Legislative lag 4. Transmission lag 5. Effectiveness lag.

Monetary Policy Lag # 1. Data Lag:

Prima facie, policy-makers do not know what is going on in the economy exactly when it happens.

Typically, an economic change that starts at the beginning of the month becomes evident at the middle of the next month. So the data lag is about 1.5 months.

Monetary Policy Lag # 2. Recognition Lag:

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Data for real economic variables are required over time as the government agencies receive more complete information. There is a recognition lag of at least two months because no policymaker pays much attention to reversals in data that occur for only one month.

Monetary Policy Lag # 3. Legislative Lag:

Unlike fiscal policy changes, which occur only once a year, monetary policy changes occur at least twice a year or, in some countries, three to four times a year. So an important advantage of monetary policy is the short legislative lag. Monetary policy changes can be legislated quickly. But the legislative lag is a major weakness.

Monetary Policy Lag # 4. Transmission Lag:

The transmission lag is the time interval between the policy decision and the subsequent change in policy instruments. This is also a more serious obstacle for fiscal policy than for monetary policy. For frequent changes in bank rate there is no transmission lag in case of monetary policy.

Monetary Policy Lag # 5. Effectiveness Lag:

The most important lag of monetary policy concerns the length of time required for an acceleration or deceleration in the money supply to influence real output. The effectiveness lag is long and variable and makes the value of the multiplier uncertain.

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