October 27, 2020 

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PEAK: The transition of a business cycle from an expansion and a contraction. The end of an expansions carries the descriptive term peak. At the peak, the economy has reached the highest level of production in recent times. The bad thing about a peak, however, is that it is a turning point, a turning point to a contraction. So even though a peak is the "highest" is not necessarily something we want. We would prefer never to reach the peak.

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The time lag that it takes government leaders and policy makers to determine the appropriate government action needed to address an economic problem. The decision lag arises because it takes time for policy makers to chose among the array of possible policy actions, each with assorted consequences that appeal differently to different political constituencies. This "inside lag" is one of four policy lags associated with monetary and fiscal policy. The other two "inside lags" are recognition lag and implementation lag, and one "outside lag" is implementation lag. All four policy lags can reduce the effectiveness of business-cycle stabilization policies and can even destabilize the economy.
The decision lag occurs because policy decisions cannot be made instantaneously. Alternatives are considered, consequences are evaluated, and decisions are made. And because the alternative policies have different impacts, including the intended correction of the problem as well as secondary consequences. Choosing, debating, and deliberating among the alternatives takes time. The decision lag is the second of the three inside policy lags. It arises after the corrective policy is identified (decision lag) and before the policy is launched (implementation lag) and the consequences of the policy are achieved (impact lag).

The key to the decision lag is simply the time needed for government leaders to make choices. In some cases, the choice might be obvious, a "no brainer," but more often than not the choice is not so obvious. The decision makers usually need to reach some sort of agreement, often through a majority vote.

And these decision makers inevitably have different concerns, represent different constituencies, and seek different consequences. The resulting tug and pull, trade-offs, and negotiations take time -- giving rise to the decision lag. This decision lag could be as short as a few hours, but is often likely to take days, weeks, or even months.

More on Government Choices

Government leaders are assigned the task of making decisions. These decisions weigh the interests of a multitude of constituencies -- different economic interests, different demographic groups, different industries, different geographic locales, different income levels, different anything and everything.

In theory, the appropriate government stabilization policies can be easily selected to address business-cycle problems. Expansionary fiscal and monetary policies both can be successfully aimed at fixing the unemployment problems of a business-cycle contraction. Contractionary fiscal and monetary policies both can be successfully aimed at fixing the inflation problems of a business-cycle expansion.

However, the specifics of the policies can have a myriad of consequences beyond just "fixing the business cycle." Monetary policy affects interest rates and the size of the government sector differently than fiscal policy. The tax side of fiscal policy affects disposable income and consumption differently than the government spending side.

If fiscal policy is used, then Congress and the President need to balance constituency interests and reach an agreement on the specifics. Should the policy involve government purchases, transfer payments, or taxes? If monetary policy is used, then the Federal Open Market Committee of the Federal Reserve System need to reach an agreement on the specifics. Should the policy involve open market operations, the discount rate or reserve requirements? These decisions could take days, weeks, or months.

Monetary versus Fiscal

The decision lag tends to be different for monetary policy than for fiscal policy.
  • Monetary Policy: The decision lag for monetary policy tends to be relatively short. Monetary policy decisions are made by the Federal Open Market Committee of the Federal Reserve System, a small group consisting of 12 members and an relatively powerful chairman. Monetary policy is their primary task. This committee meets every six weeks or sooner if needed usually comes to a policy decision when faced with a business-cycle problem with very little delay.

  • Fiscal Policy: The decision lag for fiscal policy tends to be relatively long. Fiscal policy decisions are made by Congress and the President, more often than not, literally involving and act of Congress signed into law by the President. Because Congress represents diverse interests, finding a fiscal policy that is acceptable to a majority can take time. And hopefully this decision is acceptable to the President, as well. If not, then the decision making process, and the decision lag, continues.

Other Lags

The decision lag is one of four policy lags. The other three are recognition lag, implementation lag, and impact lag. The first two are termed inside lags and the last is an outside lag.
  • Recognition Lag: This is the time it takes to identify and document the existence of an economic problem that might require government action. The recognition lag arises because it takes time to collect and analyze economic data; to verify that an actual problem exists. This lag is seldom less than a month and typically lasts a couple of months.

  • Implementation Lag: This is the time it takes for the government sector to take the steps needed to activated or implement the chosen policy. This lag is also likely to take weeks if not months.

  • Impact Lag: This is the time it takes for full effect of a government policy to work its way through the economy and cause the desired changes in production and income. This lag works through the multiplier process and is likely to take a couple of years.


Recommended Citation:

DECISION LAG, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2020. [Accessed: October 27, 2020].

Check Out These Related Terms...

     | policy lags | recognition lag | implementation lag | impact lag | automatic stabilizers |

Or For A Little Background...

     | aggregate market | Keynesian model | business cycles | monetary policy | fiscal policy | expansionary monetary policy | expansionary fiscal policy | contractionary monetary policy | contractionary fiscal policy | political views |

And For Further Study...

     | recessionary gap | inflationary gap | recessionary gap, Keynesian model | inflationary gap, Keynesian model | multiplier | accelerator principle | paradox of thrift | injections-leakages model |

Related Websites (Will Open in New Window)...

     | Federal Reserve System | White House Office of Management and Budget | | Congressional Budget Office |

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