October 21, 2017 

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BANK RESERVES: The "money" that banks use to conduct day-to-day business, including cashing checks, satisfying customers's withdrawals, and clearing checks between accounts at different banks. The "money" in question includes vault cash and Federal Reserve deposits. Specifically, vault cash is the paper money and coins that a bank keeps on the bank premises (both in the vault and in teller drawers), which is used to "cash" checks and otherwise provide the funds that customers withdraw. Federal Reserve deposits are accounts that banks keep with the Federal Reserve System, which are used to process, in a systematic, centralized fashion, the millions of checks written each day by customers of one bank that are deposited by customers of another bank. Using these deposits, the Fed acts as a central clearing house for checks, being able to simultaneously debit the account of one bank and credit the account of another. More on the importance of bank reserves can be found under fractional-reserve banking.

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The time lag that occurs after a government policy designed to correct an economic problem has been selected and the actual execution of the policy. The implementation lag is based the time it takes for government agencies, which can be slow and methodical, to carry out the designated policy. This "inside lag" is one of four policy lags associated with monetary and fiscal policy. The other two "inside lags" are recognition lag and decision 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 implementation lag occurs due to the time it takes for government agencies to undertake the steps needed to carry out the course of action, especially stabilization policies, selected by government leaders. The implementation lag is the last of the three inside policy lags. It arises only after a problem is documented (recognition lag), the corrective policy is identified (decision lag), but before the consequences of the policy are achieved (impact lag).

The key to the implementation lag is the nature of complex bureaucracies. Bureaucracies provide structure to what would be a chaotic system, otherwise. However, with this structure comes an inherent time lag.

Government bureaucracies, including all sorts of government agencies, from the Department of Defense to the Federal Reserve System to the Agricultural Research Service, are on the frontline when it comes to implementing stabilization policies. They are the ones that carry out the dictates of the policy makers. However, their actions necessarily follow rules and procedures and can be quite methodical. This means the implementation of fiscal policy and monetary policy are likely to take weeks if not months.

More on Bureaucracies

A bureaucracy is a complex organization that, more often than not, contains hundreds or even thousands of employees, each with different duties and responsibilities. Although the word government is usually added to the word bureaucracy (and make no mistake, government is not shy when it comes to complex bureaucracies), bureaucracies exist in all types of organizations -- private, public, government, business, charities, corporations, even households.

Government stabilization policies must necessarily work their way through these complex government bureaucracies. Telephone calls are made; memos are sent; meetings are scheduled; forms are filled out; reports are written. It takes time for all of these actions to transpire.

After a particular policy has been selected, steps then need to be taken to implement the policy. For any change in spending, the appropriate government agencies need to be contacted. More often than not, this involves a change in budget appropriations. The affected agencies then need to actually make changes in their spending. The act of spending is not instantaneous. Most agencies require competitive bids to identify product suppliers before they can make the expenditures. Even the employment, then subsequent payment, of additional workers takes time. The implementation of fiscal policy is also likely to take weeks if not months.

For a change in taxes, the taxing authority (usually the Internal Revenue Service) needs to be contacted. They then need to print rebate checks, establish the new tax rates, and provide information to taxpayers. These changes cannot be accomplishes instantaneously. Even with monetary policy, the Federal Reserve System needs to work with banks and brokers through the financial markets to buy and sell government securities. These transactions also take time to complete.

Monetary versus Fiscal

The implementation lag tends to be different for monetary policy than for fiscal policy.
  • Monetary Policy: The implementation lag tends to be relatively short for monetary policy. Policy decisions are implemented by a special branch of the Federal Reserve System devoted to this task. Once a policy action is identified, then the implementation steps are begun almost immediately (often by the end of the day). And because monetary policy works through financial markets (which tend to operate quickly), implementation is often completed in short order.

  • Fiscal Policy: The implementation lag tends to be relatively long for fiscal policy. Any changes in government spending or taxes need to work through the government agencies and bureaucracies before than are implemented. Bureaucracies, by their very nature, are slow to act as they make sure that necessary rules and procedures are followed. But this tends to lengthen the time needed to implement fiscal policy.

Other Lags

The implementation lag is one of four policy lags. The other three are recognition lag, decision 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.

  • Decision Lag: This is the time it takes government policy makers (Congress, the President, the Federal Reserve System) to decide on a suitable course of action and to pass whatever legislation, laws, or administrative rules are necessary. This lag could be as short as a few days, but typically lasts weeks or 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:

IMPLEMENTATION LAG, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2017. [Accessed: October 21, 2017].

Check Out These Related Terms...

     | policy lags | recognition lag | decision 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 |

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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