The Federal Reserve sets monetary policy in the United States.
As the name suggests, monetary policy lags are the time intervals that can occur between the onset of an undesirable economic condition and actual action by the government to address it, as well as the time it takes for actions taken by the government or the central bank. to take over. In this sense, monetary policy lags refer to the time that may have elapsed between the introduction of monetary policy and the actual time it takes for said policy to begin to have an effect on the economy. Monetary policies refer to the policies used by the central bank to control undesirable economic conditions in the economy, including slow growth and inflation. When monetary policies, such as raising interest rates, have been introduced, certain factors, such as the means of transmission, can contribute to delaying their implementation.
One of the factors contributing to the monetary policy lag is the way in which monetary policy is transmitted to the economy. Assuming that the objective of monetary policy is to contain the increase in inflation, the central bank can decide to increase interest rates, in which case the other banks in the economy will be the main vehicles for transmitting monetary policy. If the central bank raises interest rates, other banks will respond by raising their own interest rates and other charges on financial transactions. It will also manifest itself in the way these banks will impose greater restrictions on the issuance of loans to consumers.
Since the objective of the central bank is to reduce consumption that is the cause of inflation, the lag signal in monetary policy here is the time between when the central bank first implemented the policy and when it actually began to implement the policy. have effect. The desired effect in this case is to reduce consumption. Therefore, delays in monetary policy last until consumers actually begin to slow down the rate of consumption of goods and services. Another source of monetary policy lag stems from the time it takes for consumer and business investments to show any appreciable response to current monetary policy. Basically, the monetary policy lag is usually the result of various adjustments by different sectors of the economy to the new monetary policy.