What causes delays in monetary policy?

The Federal Reserve sets monetary policy in the United States.

Just as the name suggests, monetary policy lags are the time intervals that can occur between the onset of an undesirable economic condition and actual government action 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 such a policy to start having 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 sluggish growth and inflation. When monetary policies, such as raising interest rates, were introduced, certain factors such as the means of transmission can contribute to causing a delay in their implementation.

One of the factors that contribute to the lag in monetary policy 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 may 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 reciprocate by raising their own interest rates and other charges on financial transactions. It will also manifest itself in the way in which greater restrictions will be imposed by such banks on the issuance of loans to consumers.

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Since the objective of the central bank is to reduce consumption that is the cause of inflation, the signal of lag in monetary policy here is the time between when the central bank first implemented the policy and when it really started to take effect. The desired effect in this case is to decrease consumption. Thus, delays in monetary policy last until consumers actually start to slow down the pace 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 some kind of appreciable response to the monetary policy in force. Basically, the monetary policy lag is usually the result of several adjustments by different sectors of the economy to the new monetary policy.

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