ArticlePDF Available

The Phenomenon of Lag in Application of the Measures of Monetary Policy

Authors:
  • Global Network for Socio-economic Research and Development

Abstract and Figures

This paper discusses the theoretical aspect of the phenomenon of lag in the application of the measures of monetary policy. Monetary and fiscal policy faces the phenomenon of lag. One of the controversial and pressing questions of monetary policy is the nature and length of lag between the application of the measures of monetary policy and the effects on macroeconomic aggregates. While the monetary strategy points to several possible reasons for the lag, there is no general agreement on the length of the lag. The study of the phenomenon of lag imposes two questions: what does the lag of the application of monetary processes and policy imply and why are the asset holders not capable of immediately adjusting their portfolios at the time of disbalance? There are two categories of lag known in economic literature: the inside lag (which encompasses the recognition of the problem and the implementation of measures) and the outside lag (which encompasses the reaction of macroeconomic aggregates to the applied measures of monetary policy). The paper descriptively notes the different identifications of time lag and provides schematic representations of the effects of the observed phenomenon.
No caption available
… 
No caption available
… 
Content may be subject to copyright.
PhD Tihomir Jovanovski1 UDK 336.7:65.015.2
M.sci Mehmed Muric2
THE PHENOMENON OF LAG IN APPLICATION OF THE MEASURES OF
MONETARY POLICY
ABSTRACT
This paper discusses the theoretical aspect of the phenomenon of lag in the application of the
measures of monetary policy. Monetary and fiscal policy faces the phenomenon of lag. One
of the controversial and pressing questions of monetary policy is the nature and length of lag
between the application of the measures of monetary policy and the effects on
macroeconomic aggregates. While the monetary strategy points to several possible reasons
for the lag, there is no general agreement on the length of the lag. The study of the
phenomenon of lag imposes two questions: what does the lag of the application of monetary
processes and policy imply and why are the asset holders not capable of immediately
adjusting their portfolios at the time of disbalance? There are two categories of lag known in
economic literature: the inside lag (which encompasses the recognition of the problem and
the implementation of measures) and the outside lag (which encompasses the reaction of
macroeconomic aggregates to the applied measures of monetary policy). The paper
descriptively notes the different identifications of time lag and provides schematic
representations of the effects of the observed phenomenon.
Key words: Monetary Policy, measures of monetary policy, time lag, problems of lag,
consequences.
INTRODUCTION
The application of monetary politics and achieving the goals of monetary politics
would be significantly facilitated if complete information about the effects of transitional
mechanisms of monetary processes, as well as the actual relations between the instruments of
monetary policies, financial and real variables existed. In such a case, the only thing left to
the bearers of monetary policy to do is to fulfill the task at hand to the best of their
capabilities, in respect to the handling of available instruments of monetary regulation in a
way that results in known and wanted effects on the level and extent of change of final goals
of monetary policies.
Within the process of formulation and application, monetary policy is marked by a far
greater lack of information than most of the other economic policies. When discussing other
economic policies, such as fiscal or foreign currency policies, it is possible to appropriately
evaluate the situation and the effect of the changes brought on by one of the instruments of
monetary policies on the variables of the ultimate macroeconomic goals.
As far as monetary policy is concerned, what remains unknown are the full effects of
the change in the reference interest rate of the central bank or the change in reserve
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1 European Center for Peace and Development (ECPD) University for Peace established by United Nations.
2 PhD student. Societe Generale Bank Serbia, mesamuric@gmail.com!
requirements with respect to inflation, employment or any other ultimate outcome variable of
that policy, or even when that effect (i.e. with what time span) will be visible. The reason for
this can be found in the fact that there is no complete information concerning the relations
between the monetary sector of one economy and its real sector. The empirical experiences of
the transfer of monetary impulses onto real variables and the feedback of the effects from the
real towards the monetary sector of economy are still unsatisfactory [Živković & Kožetinac,
2008, 291].
Monetary and fiscal policies face the phenomenon of lag. One of the controversial and
pressing questions of monetary policy is the nature and length of lag between the application
of the measures of monetary policy and the effects on macroeconomic aggregates. While the
monetary strategy points to several possible reasons for the lag, there is no general agreement
on the length of the lag [Cagan & Gandolfi, 1969, 277].
The goal of this paper is to explain the phenomenon of lag in application of the
measures of monetary policies from a theoretical aspect.
1. THE PHENOMENON OF LAG
The theoretical and empirical research into lag of the effects of monetary policies, as
well as the phenomenon of lag itself, is needed because these measures are not visible
immediately and fully, but after some time and appear inconsistently.
Essentially, there is no single occurrence which could be referred to as lag of the
effects of monetary policies. If we presume that the effect of a single momentary monetary
change to national income could be fully isolated, it would doubtlessly be seen that the effect
immediately starts rising to its high point and then gradually decreases and does not stop for a
certain period of time. Thus, the term of distributed temporal lag can be discussed. When we
talk about a specific kind of lag, we usually refer to something as the average interval
between the application and effect of a certain measure [Friedman, 1973, 262].
The application of monetary policy, but also macroeconomic policies in whole, is
complicated by the presence of lag in the ultimate application of undertaken measures; the lag
between the action of the policy and its effects on macro aggregates (production,
employment, income, etc.); the lag between recognizing the need for action and measure
implementation based on the prognosis of future economic conditions. The presence of
change lag of political variables is burdened by the risk of the nature of the problem, which
caused the change in political actions, being completely altered during the application of
policies [Cooper et al., 1983, 540].
Monetary policy produces effects to economic motions in the situation of portfolio
imbalance (real and financial property) of the transactor, which effects the purchase and sale
of financial and real assets to restore balance, when the marginal unit of each asset will reject
equal income, or when there will be no advantage of changing the possession of different
forms of assets.
Further study of the lag phenomenon imposes two questions: what is implied by lag
during monetary processes and why are the asset holders unable to immediately adjust their
portfolios in the conditions of imbalance?
It is a fact that the transactors do not immediately adjust to altered circumstances for
two reasons: (1) they need time to become aware of the conditions and (2) when they become
aware of the imbalance in their portfolios, they need time to correct them [Crockett, 1979, 74-
75].
Therefore one of the main insecurities in the application of monetary policies is the
lag between the precise need for action and the effect of that action to the ultimate goals of
monetary or macroeconomic policy.
The time frame for political action depends on the fundamental stability or instability
of the economy. If the inner strength of a stable economy is powerful, short term behavioral
changes in the economy can swiftly immobilize autonomous powers to restore balance
(McCarty, 1982, 436). This is the reason why the economy can absorb initial changes without
any political changes, while political interventions would even be harmful at this point. In
case the inner strengths for stability are weak, the required time for autonomous adjustment
will be unacceptably long. Political interventions must be passed quickly so the process of
stabilizing the economy is as short as possible.
When the information is gathered slowly and is incomplete, it is difficult to come to a
swift political decision. Short term goal values can be wide-ranged when compared to
fundamental economic conditions. A lag of the effects of political actions causes problems in
determining clear goals for immediate action [Živković & Kožetinac, 2008, 315-316].
2. COMPONENTS OF LAG
In time lag analysis, we can differentiate between several of its components
[Živković, 1993, 76-79]: (1) Implementation lag which represents the time interval between
the moment when monetary actions need to be applied and the moment when the action is
implemented and (2) operation lag which is the time interval between the moment of
implementation of the instruments of monetary policies and the moment when their effects
become apparent on the ultimate goals.
Other such divisions can also be found in economic literature. Inside lag encompasses
the following:
Recognition lag the time span between the moment when the need
for implementation of monetary policies arises and the moment when the monetary
authorities act [Živković & Kožetinac, 2008, 318]. For instance, before any action is
undertaken, the existence of any problem has to be identified. The identification of a
problem implies gathering and analyzing economic data. Data concerning
unemployment and inflation is usually available for the previous month. Let us
presume that the unemployment rate for January is available in February. The GDP
data is collected quarterly and is accompanied by a long delay. The GDP data for
January, February and March, for instance, are available in April or even May. When
the data is collected, it is necessary to analyze it and determine with certainty the
outcomes of the problems. This analysis often requires data gathered over several
months to establish the trends and eliminate temporary statistical digressions.
Action lag is the lag between the moment when the monetary
authorities act and the moment when the banking system faces altered conditions.
Outside lag – is the time span between the moment when the banking
system functions under altered conditions and the moment when the companies and
households, i.e. the non-banking sector, face altered monetary mass and credits
[Živković & Kožetinac, 2008, 318].
If we presume that the time span between the moment when the need for
implementation of monetary action arose and the actual implementation of monetary
measures is close to zero, then the inside lag is the result of recognition lag [Kraken & Slow,
1963, 3-7].
Wrighstman (1971) differentiates the following forms of lag of effects of monetary
politics: (a) first time lag between the need for action and the implementation of monetary
action; (b) second time lag between the implementation of monetary action and the effects of
the actions to changes in the financial sphere (altered interest rates, monetary mass and other
financial variables), or within the real sphere (changes in actual income, production, etc.).
Crockett (1979) believes it is important to differentiate the various kinds of lag based
on the moment when the political changes become necessary and the moment when political
actions give results. He distinguishes: (a) information lag which is the time needed for
gathering the information and presenting it to the policy makers, and which point to future
changes in the political course; (b) implementation lag is the time needed to formulate the
appropriate policies in terms of the new conditions, and which lasts from the moment the
policy makers become aware of the changed circumstances; (c) instrument response lag
appears when the immediate variables do not respond to the changes in the instrument
variables; and (d) reaction lag representing the lag which includes the reaction of target
variables to the change of immediate variables.
Struthers and Speight (1986) came to the following conclusions in their research: the
total lag consists of several distinct sections, which can be classified within inside and outside
lag. The inside lag can be further split into recognition lag (the time needed to decide which
action to implement). The largest portion of this lag is the information lag which arises from
the following reasons: (a) information which the economic policy and especially monetary
policy makers require to make an accurate picture of the state of the economy, is statistical in
nature and needs time (at least a month, and in some cases a quarter or longer) to be gathered
and processed. From this it can be concluded that the policy makers always deal with
outdated and incomplete information, which can have serious repercussions, depending on
whether the situation is changing and how fast; (b) all the variables which are mutually
conditioned on the same change tracks cannot be encompassed statistically; (c) some of the
short term changes in track movements of a certain variable can statistically point to a new
trend in the movement of the observed phenomenon, even though there is a reversible
deviation from that trend.
The next inside lag is the implementation lag or administrative lag. It consists of
decision lag which is the time needed to establish what is to be done, and action lag which
represents the time needed for the decided action to be taken.
Outside lag is the period between the application of political measures and the effects
of these changes on the ultimate outcomes of economic policy. Different financial lags should
also be mentioned here: interest rate lag for changes in the amount of money; time for the
banks and other financial institutions to adjust their portfolios; transactor’s reaction lag
dealing with money or exacting credits caused by changes in the interest rate; response lag of
the new securities on financial markets to changes of interest rates and the general economic
climate.
Pierce (1984) states three causes of lag in political actions, and these are: (1)
recognition lag; (2) implementation lag; and (3) response lag of the economy to political
changes. These three types of lag determine the total duration between the need for a change
in the political course and the ultimate effects on the national economy, with the duration of
the lag significantly decreasing the ability of monetary politics to stabilize the economy in a
short time [Živković & Kožetinac, 2008, 318-320].
Diagram 1. Time lag of the measures of monetary politics
Source: The authors
Empirical evidence in developed market economies shows that the effects of fiscal
policy are felt sooner than the effects of monetary policy. Fiscal policy directly influences
aggregate demand and income. Monetary policy influences aggregate demand and financial
income indirectly, through changes in interest rates and wealth. Fiscal policy is also changed
relatively rarely, but its changes seem permanent to the economy subjects. Monetary policy is
changed more frequently and the economy transactors find it hard to differentiate between
transitory and permanent changes. In addition, the measures of fiscal policies affect aggregate
demand sooner, where the shorter effect lag of fiscal policy is not the result of the longer
implementation lag of the measures of fiscal politics.
Fiscal and monetary politics are similar in the way of recognition lag; however, while
monetary politics have a shorter implementation lag, fiscal policy has a shorter effect lag.
Coming to a decision on the plan of monetary politics is faster than that is the case with fiscal
politics, which has a longer coordination lag and takes longer to pass the necessary laws. Due
to these characteristics, monetary politics is the key instrument of macroeconomic politics in
implementation of economic stability [Živković & Kožetinac, 2008, 321-322].
Diagram 2. Time lag of monetary politics and the cyclic movement of economic activity
Source: [Poindexter & Jones, 1980, 496-501]
Three phases of lag can be seen on the curve of the business cycle shown in diagram
2. [ Poindexter & Jones, 1980, 496-501], and these are the following:
Recognition lag (t0 – t1) can amount to several months before the
stabilization politics bearers become aware of the need for action;
Administration lag (t1 – t2) shows the interval between recognizing the
need for political action and the moment in time when action is taken;
Operation lag (t2 t3) is the time interval during which the effects of
implemented political measures become evident.
What needs to be stressed is that the main effect on economic activity becomes
apparent during time interval t3. It is because of this that the outside lag is more important
than the inside lag, because it shows the postponed effects of implemented monetary policies.
Empirical research does not provide solid evidence for the length of this kind of lag and
ranges anywhere between a month and up to two or three years, when the actions of monetary
politics begin to significantly affect the economy [Živković & Kožetinac, 2008, 322].
3. MEASURING THE LENGTH OF MONETARY POLICY MEASURES LAG
The problem of lag is much more complex than it would seem based on the
aforementioned descriptions of this economic phenomenon. The process of lag is manifested
in the following way: the reaction to some of the monetary variables is spread during the
period of implementation and the effects of political action can accumulate and reach a peak
of maximum value sooner or later during the process; they can manifest in the form of
amplitudes with several different values.
The lag in monetary politics comes from two different kinds of problem: the first, if
the lag lasts very long – for two or three years – expansive monetary politics can have
consequences, maybe even the main consequences to the economic trends in the time when
the situation is completely changed and when the restrictions of demand and deceleration of
monetary growth become necessary, and vice versa. The second problem is if the lag is
unstable and constant, the inclusion of the time factor can become overly difficult, and the
effects of that action are slightly better than simple guessing [Struthers & Speight, 1980, 311-
313].
Establishing the needed time span to achieve the greatest or complete effect, or
producing a given percentage of the complete effect should be included in the terms of
measuring the lag of the manifestation of certain monetary variables or measurements.
Postponing the reactions can vary from one immediate variable to another, from one
ultimate goal to another. This is the case, for instance, when the short term interest rates are
more flexible than long term interest rates, and banking rates being more flexible than
interbanking rates. The response lag of some transactors varies in length depending on
different activities. Finally, the length of lag varies with respect to the way of formulating the
monetary policies and the choice of monetary variables. This is the case in the USA, where
the length of the lag depends on the choice of operative monetary variables. While the total
bank reserves, the primary money of monetary mass have short term lag of four to five
quarters, the unborrowed reserves manifest fully only after a lag of two and a half years
[Struthers & Speight, 1980, 312].
The most important question connected to the implementation of monetary policies is
the length of lag. Even though a great deal of empirical research on this subject has been
carried out, it is extremely difficult to precisely determine the length of the inside and outside
lag above all because that length is variable.
For monetary politics, the insides lag amounts to an average of three to six months
(three to four months for recognition and a month to two for action). While the inside lag is
longer and highly variable for fiscal policies, the outside lag for monetary policies amounts to
anywhere between twelve to eighteen months, and only a few months for fiscal policy.
[Willes, 1968, 67-73].
Table 1. The estimated ranking of average time lags for monetary and fiscal policies (in
months)
Inside lag
Policy
Recognition lag
Action lag
Outside lag
Monetary policy
3
0
1 – 20
4 – 23
Fiscal policy
3
1 – 15
1 – 3
5 – 21
Source: [Willes, 1968]
4. EMPIRICAL EVIDENCE OF TIME LAG
Although the concept of lag of monetary policies has deep historical roots in the
literature of monetary economy, there are only a small number of studies which are focused
on studying this economic phenomenon. In their earlier studies, Cagan and Gandolfi (1969)
used a time sample of monetary effects on the interest rates as an indirect measure for the
trends of expenses and incomes. Their findings indicate that the effect of lag on the actions of
monetary policies on incomes sums up to between six months and two years. Friedman
(1972), continuing one of his previous works and using the data from the USA and UK,
published empirical evidence of the lag of actions of monetary policies (the amount of
money, for instance) and its result in the way of inflation, and by doing so confirming his
hypothesis from the past. Tanner (1979) tested the variability of lag between the actions of
monetary policies and the results in the change of production. His results showed that the
length of lag is highly variable. Duduay (1994), using the data from Canada, estimated that
the lag of monetary policies with respect to production amounts to twelve to eighteen months
and that the lag connected to inflation is from eighteen to twenty-four months. Batini and
Nelson (2001) confirm Friedman’s (1972) empirical results. Applying the data from the USA
and UK from the period from 1953 to 2001, they established that the length of lag of the
effects of measures of monetary politics sums up to twenty-five months for the USA and
thirteen months for the UK. They also estimated the length of lag by utilizing various samples
from this period and they found little proof that the length of lag shortened in the recent
years, which led them to the contrary conclusion that the length of lag became longer in the
recent period. Hafer et al. (2007) re-examined the role of money and established a statistically
strong relationship between lag in the change of the amount of money and the production
gap.
From this empirical evidence, the phenomenon of lag in monetary policy becomes
obvious, both in the past and the present and remains one of the key factors influencing the
management of monetary policy [Nishiyama, 2009, 2].
Due to the variability of the calculated time lag, the importance of the question of
efficiency of operations of macroeconomy is growing, and especially in its concept of
monetary policy. In the conditions where the length of lag and/or the length susceptible to
change, i.e. the variable size, cannot be precisely determined, it is increasingly difficult to
manage an efficient stabilization policy. The time needed for monetary policy to influence the
key macroeconomic variables is of crucial importance for its benefits as an instrument of
macroeconomic stabilization. If the lag of monetary policy is simultaneous and of long and
variable duration, the discretional politics can act towards destabilization. [Cooper et al.,
1983, 390-391].
In case the total lag lasts longer than the validity period of reliable economic
prognosis of target variables, the fulfillment of political goals can have a destabilizing effect.
Similarly, the high variability of lag limits the range of monetary policy [Uselton, 1974, 11].
Efficient monetary policy or stabilization policy must be formulated based on reliable
economic predictions. The key importance is given to recognition lag rather than prognosis.
If the time horizon of reliable economic prognosis is longer than the total lag of the effects of
monetary politics, then the only thing that can jeopardize the results of the preferred
monetary policy is the unpredictability of the lag [Živković & Kožetinac, 2008, 327].
CONCLUSION
The phenomenon of lag in the implementation of measures of monetary politics is a
controversial and cumbersome problem of monetary politics because the stabilizing or even
destabilizing effect of these measures depends on the length of the lag. Research has shown
that if the average lag is extremely long and highly variable at the same time, monetary
politics can destabilize the situation. Monetary policies must respond eventually, because it
takes time for them to become active and begin to affect the economy trends. For successful
monetary policy management, it is not enough only to know the length of the lag but also the
lasting of the effects of the undertaken monetary actions. In the case of monetary policies, it
is essential to possess the right prognosis beforehand to ensure the precise timing and
direction of monetary actions. However, when the lag varies, it is difficult to reach a decision
in the right direction of the actions, which could lead to contributing to the instability of the
economy, if the decisions were made using incomplete and improper information. When
discussing this problem, Friedman stated at one point that the empirical evidence persuaded
him that it is much more important to prevent monetary changes to contribute to the
instability, than it is their exact use to neutralize the other forces at work.
Due to the existence of time lag in the implementation of monetary policy it is not
realistic to expect the monetary policies to generate immediate on-line effects. Time needs to
pass until the economic transactors adjust to the newly created circumstances and financial
conditions, or until the real expenses adjust to the existing amount of money in the monetary
system. This must be taken into account while planning and implementing monetary policies,
because their efficiency will be greater in the measures which are capable of predicting the
future trends ex ante, and with high likelihood, so that the activated instruments of monetary
politics in the previous period are appropriate for the upcoming conditions.
LITERATURE
1. Batini, N., Nelson, E. (2001) “The lag from monetary policy actions to
inflation: Friedman revisited”, International Finance, 4(3): 381 - 400.
2. Cagan, P., Gandolfi, A. (1969) “The Lag in Monetary Policy As Implied by
the Time Pattern of Monetary Effects on Interest Rates”, American Economic
Review, 59: 277 - 284.
3. Cooper et al. (1983) Money, the Financial System and Economic Policy,
Addison-Weseley Publishing Company.
4. Crockett, A. (1979) Money – Theory, Policy and Institutions, Second Edition,
Nelson.
5. Duguay, P. (1994) “Empirical Evidence on the Strength of the Monetary
Transmission Mechanism in Canada - An aggregate approach.”, Journal of
Monetary Economics, 33: 39 - 61.
6. Friedman, M. (1972) Have monetary policy failed?” American Economic
Review, 62: 11 - 18.
7. Friedman, M. (1973) Teorija novca i monetarna politika, (Beograd: Rad).
8. Hafer, R.W., Haslag, J.H., Jones, G. (2007) “On money and output: Is money
redundant?” Journal of Monetary Economics, 54: 945 - 954.
9. Kraken, I., Slow, R., (1963) Summary of Part I, Lags in Monetary Policy,
Stabilization on Policies Commision on Money and Credit ( Prentice-Hall).
10. McCarty, M., H. (1982) Money and Banking – Financial Institutions and
Economic Policy, (Addison - Wesley Publishing Company ).
11. Nishiyama, S. (2009) Monetary Policy Lag, Zero Lower Bound and Inflation
Targeting, (Bank of Canada).
12. Pierce, J., L. (1984) Monetary and Financial Economics, (John Wiley and
Sons).
13. Poindexter, J., C. & Jones, C., P. (1980) Money, Financial Markets and the
Economy, (West Publishing Company).
14. Struthers, J. & Speight, H., (1980) Money, Institutions, Theory and Policy,
(Longman).
15. Tanner, J.E., (1979) “Are the lags in the effects of monetary policy variable?”
Journal of Monetary Economics, 5: 105 - 121.
16. Uselton, G., C. (1974) Lags in the Effects of Monetary Policy, (Marcel
Dekker).
17. Willes, M., A. (1968) “Lags in Monetary and Fiscal Policy”, FRB of
Philadelphia Business Review,: 67 – 73.
18. Wrightsman, D. (1971) An Introduction to Monetary Theory and Policy, (New
York: The Free Press).
19. Živković, A., & Kožetinac, G. (2008) Monetarna ekonomija, (Beograd: Centar
za izdavačku delatnost Ekonomskog fakulteta).
20. Živković, A., (1993) Analiza efikasnosti monetarne politike u Jugoslaviji,
(Beograd: Ekonomski fakultet).
FENOMEN VREMENSKOG POMAKA („LAG“) U PRIMJENI MJERA
MONETARNE POLITIKE
SAŽETAK
Ovaj rad se bavi teorijskim aspektom fenomena vremenskog kašnjenja u djelovanju mjera
monetarne politike. Monetarna i fiskalna politika suočavaju se s fenomenom kašnjenja. Jedno
od kontroverznih i opterećujućih pitanja monetarne politike jest priroda i duljina kašnjenja
između izvršenja monetarnih mjera i efekata na makroekonomske agregate. Dok monetarna
strategija ukazuje na nekoliko mogućih razloga kašnjenja ne postoji opća suglasnost u vezi
duljine kašnjenja. Proučavanje fenomena kašnjenja nameće dva pitanja: šta implicira
kašnjenje u odvijanju monetarnih procesa i monetarne politike i zbog čega u uvjetima
neravnoteže vlasnici aktiva nisu sposobni prilagoditi svoje portfolije neposredno? U
ekonomskoj literaturi poznate su dvije kategorije kašnjenja: unutarnje kašnjenje (koje
obuhvaća prepoznavanje problema i provedbu mjera) i vanjsko kašnjenje (koje obuhvaća
reakciju makroekonomskih agregata na provedene mjere monetarne politike). U radu su
deskriptivno navedene različite identifikacije vremenskog kašnjenja a dati su i shematski
prikazi djelovanja promatranog fenomena.
Ključne riječi: monetarna politika, mjere monetarne politike, vremensko kašnjenje, problemi
kašnjenja, posljedice
... Policy lags are generally understood as unavoidable time delays. While there may exist several possible reasons for a lag, there is no general agreement on its length (18). This can be explained by the high sensitivity of the lagged and baseline exposure terms and also the implication of time-varying confounding variables in the models (19). ...
Article
Full-text available
Introduction Evaluating the potential effects of non-pharmaceutical interventions on COVID-19 dynamics is challenging and controversially discussed in the literature. The reasons are manifold, and some of them are as follows. First, interventions are strongly correlated, making a specific contribution difficult to disentangle; second, time trends (including SARS-CoV-2 variants, vaccination coverage and seasonality) influence the potential effects; third, interventions influence the different populations and dynamics with a time delay. Methods In this article, we apply a distributed lag linear model on COVID-19 data from Germany from January 2020 to June 2022 to study intensity and lag time effects on the number of hospital patients and the number of prevalent intensive care patients diagnosed with polymerase chain reaction tests. We further discuss how the findings depend on the complexity of accounting for the seasonal trends. Results and discussion Our findings show that the first reducing effect of non-pharmaceutical interventions on the number of prevalent intensive care patients before vaccination can be expected not before a time lag of 5 days; the main effect is after a time lag of 10–15 days. In general, we denote that the number of hospital and prevalent intensive care patients decrease with an increase in the overall non-pharmaceutical interventions intensity with a time lag of 9 and 10 days. Finally, we emphasize a clear interpretation of the findings noting that a causal conclusion is challenging due to the lack of a suitable experimental study design.
... Furthermore, Sims and Zha (1999) and Giordano et al. (2007) pointed out that error bands corresponding to 0.68 probability is often more useful than 0.95 bands since they provide a more precise estimate of the true coverage probability. 14 Data on GDP are collected quarterly and are typically released two months after the end of a quarter (Jovanovski and Muric, 2011). 15 The elasticity of net revenue to GDP (e Y nr ) is estimated as the product of the elasticity of revenue to GDP (e Y r ) and the average ratio of revenue over net revenue (r=nr) in the period examined. ...
Article
Full-text available
This article aims to estimate fiscal multipliers in Italy by assessing the effect of an increase in government expenditure and taxes on the Gross Domestic Product (GDP). By applying structural vector autoregressive modelling to Italian quarterly data for the 1995–2019 period, I show that expansionary fiscal policies produce positive effects on the GDP level. Estimated spending multipliers are higher than 1, and when government investment and consumption are compared, findings show that government investment has a larger effect on GDP than government consumption. Estimated tax multipliers are lower than 1, and tax-based policies are less effective in stimulating GDP than expenditure-based fiscal plans. My findings strongly support the Keynesian perspective and indicate that Italy should increase public investments considerably in order to foster economic growth.
... Policy lags are generally understood as unavoidable time delays. While there may exist several possible reasons for a lag, there is no general agreement on its length (Jovanovski and Muric, 2011). Similar time lags have been noticed during the COVID-19 outbreak. ...
Article
Full-text available
The unprecedented challenges caused by the COVID-19 pandemic demand timely action. However, due to the complex nature of policy making, a lag may exist between the time a problem is recognized and the time a policy has its impact on a system. To understand this lag and to expedite decision making, this study proposes a change point detection framework using likelihood ratio, regression structure and a Bayesian change point detection method. The objective is to quantify the time lag effect reflected in transportation systems when authorities take action in response to the COVID-19 pandemic. Using travel patterns as an indicator of policy effectiveness, the length of policy lag and magnitude of policy impacts on the road system, mass transit, and micromobility are investigated through the case studies of New York City (NYC), and Seattle—two U.S. cities significantly affected by COVID-19. The quantitative findings show that the National declaration of emergency had no policy lag while stay-at-home and reopening policies had a lead effect on mobility. The magnitude of impact largely depended on the land use and sociodemographic characteristics of the area, as well as the type of transportation system. Our framework effectively identifies abrupt and significant changes in different transportation systems and can be utilized in understanding dynamics related to COVID-19. Knowing the possible length of lag from enactment of social distancing and reopening policies to heterogeneous impacts on different cities and transportation systems will aid transportation agencies with resource allocation decisions and systems readiness in the event of future outbreaks.
... In a similar vein, the lag between the commitment and disbursement of aid can also be taken into consideration, which further widens when the donor faces temporal shocks. Temporal lags could also arise due to institutional inefficiencies or to lags regarding information flow, recognition, or implementation (Jovanovski & Muric, 2011). As a result, the budget planning of the recipient government is affected, especially when aid forms a significant chunk of its GDP. ...
Article
Full-text available
This study investigates the link between fungibility and international aid effectiveness by combining quantitative and qualitative methods; using state-of-the-art statistical analysis with in-depth interviews with key stakeholders, it provides deeper insights into fungibility and its drivers. It uses a different starting point than most studies on fungibility, namely that fungibility might actually be quite positive to achieve Sustainable Development Goals (SDGs). It contributes empirically to the debate on aid effectiveness and fungibility with respect to Pakistan, one of the largest recipients of Official Development Aid (ODA) over the past decades. Findings suggest that there is an inverted U-shaped relationship between aid inflows and government development expenditures. While development expenditures of the government rise initially with aid inflows, expenditures actually decline with higher aid levels. Looking at the interviews for the case of Pakistan, we can conclude that this higher level of fungibility with higher aid inflows might actually be good news for recipient countries, as valid reasons to reallocate the original allocations also emerged. Our main policy implication is that donors and recipient governments should collaborate more on the allocation and redistribution of funds to ensure successful progress towards the SDGs with minimal loss of scarce resources.
Article
Full-text available
The Covid-19 pandemic has had major implications for government administration. Policymakers set policies for handling Covid-19 as a priority agenda at this time. However, these measures have reduced other problems such as stunting which still requires government attention. This article explores policy management of stunting by the local government amid the Covid-19 pandemic with the West Sumatra province case. The findings in the field, show that the implementation of stunting prevention policies is not easy considering the powerlessness caused by budget refocusing and overlapping authorities between institutions. Meanwhile, the meaninglessness is indicated by the low level of public support for the handling of stunting. This is exacerbated by a bureaucratic culture that is slow to implement policies, including in managing stunting-related programs during the Covid-19 crisis. So that there is alienation or what we call as alienation in the bureaucracy in implementing stunting prevention policies. In the end, the management of stunting policies during the Covid-19 pandemic should receive strong support from all involved parties.
Article
This paper investigates the determinants of economic growth from both a theoretical and an empirical perspective. The paper combines the supermultiplier model of growth with the Neo-Schumpeterian framework that emphasises the entrepreneurial role of the state. We aim to detect the macroeconomic effect generated by alternative fiscal policies: generic ones and more directed ‘mission-oriented’ ones. Using an SVAR model for the US economy for the 1947–2018 period, we show that mission-oriented policies produce a larger positive effect on GDP (fiscal multiplier) and on private investment in R&D (crowd-in effect) than the one generated by more generic public expenditures.
Article
There is an emerging consensus that money can be largely ignored in making monetary policy decisions. Rudebusch and Svensson [1999, Policy Rules and Inflation Targeting. In Taylor, J.B. (Ed.), Monetary Policy Rules. University of Chicago Press, Chicago, 203–246; 2002, Eurosystem Monetary Targeting: Lessons from US Data. European Economic Review 46, 417–442] provide some empirical support for this view. We reconsider the role of money and find that money is not redundant. More specifically, there is a significant statistical relationship between lagged values of money and the output gap, even when lagged values of real interest rates and lagged values of the output gap are accounted for. We also find that inside and outside money provide significant information in predicting movements in the output gap.
Article
This paper examines the transmission of monetary policy in Canada. It emphasizes the transmission through interest rates and the exchange rate rather than through changes in monetary aggregates and provides empirical evidence on the strength of these channels using a highly aggregated structural model. Implications of these structural equations for the dynamic effects of monetary policy are explored through a simulation analysis.
Article
Although the concept of monetary policy lag has historical roots deep in the monetary economics literature, relatively little attention has been paid to the idea. In this paper, we build on Svensson’s (1997) inflation targeting framework by explicitly taking into account the lagged effect of monetary policy and characterize the optimal monetary policy reaction function both in the absence and in the presence of the zero lower bound on the nominal interest rate. We numerically show the function to be more aggressive and more pre-emptive with the lagged effect than without it. We also characterize the long-run stabilization cost to the central bank by explicitly taking into account the lagged effect of monetary policy. It turns out that, in the presence of the zero lower bound constraint, the long-run stabilization cost is higher with the lagged effect than the case without it. This result suggests that the central bank and/or the government should set a relatively high inflation target when confronted with a relatively long monetary policy lag. This can be interpreted as another justification for targeting a positive inflation rate in the long-run.
Article
This paper presents evidence on the monetary transmission process in the euro area, based on macroeconomic data and on micro data on banks. According to the estimations of macro vector autoregression and macroeconometric models, a monetary policy tightening significantly reduces output and--after a time lag--also prices. The effect on output is temporary, while that on prices is permanent. Clear patterns of significant asymmetries in the monetary policy effects across countries do not emerge. The estimations based on micro data on banks show that the main factor that determines the average bank's response to monetary policy is its degree of liquidity: the lower its share of liquid assets in total assets, the more strongly does a bank reduce its lending in response to a monetary tightening. Bank size does not emerge as an important factor for a bank's reaction to monetary policy. These results hold for virtually all member countries of the European Monetary Union, despite the differences in their banking systems. Copyright 2003, Oxford University Press.