Question

1. Explain the effects of time lags on monetary policy.

Answer 1

Ans. Time lags can make policy decisions difficult. It is estimated that the interest rate changes may take upto 18 months to have their full impact. This in turn means that the monetary policy needs to try and predict the state of the economy fot up to 18 months ahead but this is very difficult in practice. A lengthy lag in the effect of monetary policy could mean that it does just the opposite: stimulates the economy during inflation and further depresses it during a recession. There can be different types of lags like:- inside lags, recognition lags, decision lags, action lags implementation lags and outside lags.