Reviewed by Aug 27, 2020| Updated on
Implementation lag is the gap between an adverse macroeconomic occurrence and the response by government and central bank through implementing a corrective fiscal or monetary policy.
How to Identify?
After a macroeconomic shock, there is always a lag on implementation. Due to data lag, policymakers may not even know that there is a problem. A lot of economic data after the time to which it refers will not be released for a month or a quarter. Even then, successive revisions may be made to these lagging indicators. For example, when first published, GDP data is notoriously unreliable, which is why the authority warns that its forecasts are insightful, but never really final.
Understanding with an Example
Think about it from a vacationer perspective. Imagine you're driving a car with no spare tire. Definitely not recommended! When you are on the way, you run over a big screw due to which one of your tires got punctured with a small hole. You don't find a problem at first.
However, within an hour or so, you find that the tire has been contracted for some time. Had you immediately known about it, you could have patched it up and gone on your way. But the tire is flat by this time, and you're awaiting a tow truck. In a hotel in the small town, you're trapped overnight, so you certainly need a lift.
Sure, let's look at the story from an economic point of view. The car can be seen as the economy in macroeconomics, and the car with a flat tire represents an economy that is going through a recession.
The argument is that fiscal and monetary authorities often move into the economic driver's seat but often don't immediately recognize an issue. Deciding on the correct strategy, time to implement fiscal or monetary policies, and even more time for policy measures to become successful may take time.