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January 18, 2019 

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IMF: The abbreviation for International Monetary Fund, which is an agency of the United Nations established in 1945 to monitor and stabilize foreign exchange markets. Close to 150 of the world's nations (which is just about all of them) belong to the IMF. The IMF was set up to keep countries from manipulating their exchange rates in such a way as to gain a competitive trading advantage over others. Their strategies of control have changed over the decades, but they currently use a managed float where exchange rates are allowed to fluctuate with changing market conditions, but only within certain ranges. The IMF also plays an active role in providing the "international" currency needed to participate in foreign trade through its system of Special Drawing Rights.

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RECOGNITION LAG:

The time lag that 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 "inside lag" is one of four policy lags associated with monetary and fiscal policy. The other two "inside lags" are decision 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 recognition lag occurs because information documenting the state of the economy is not instantaneously available. The collection of this information takes time. The processing of this information takes time. The analysis of this information takes time. All of this is needed to document the existence of a problem and whether or not the problem warrants government policy action. The recognition lag is the first of the three inside policy lags. It arises before the corrective policy is identified (decision lag), the policy is launched (implementation lag), and the consequences of the policy are achieved (impact lag).

The key to the recognition lag is simply the time needed to measure economic activity. The acquisition of information is a scarce good that requires productive resources with alternative uses. Surveys are conducted. Data are compiled. Spreadsheets are tabulated. Statistics are calculated. Reports are written. The time required to complete these assorted tasks gives rise to the recognition lag. The appropriate stabilization policies cannot be enacted to solve a problem without identifying the problem itself. This recognition lag is likely to take at least one month are often longer.

More on Data Collection

The key measures of macroeconomic performance are the unemployment rate, the inflation rate, and gross domestic product. Other lesser know measures on combined into what are termed the leading, coincident, and lagging economic indicators. Most of these measures are available on a monthly basis. Some are available on a quarterly (three-month) basis. Few are available until weeks or months after the period measured.

Unemployment and inflation data are usually available only a month or so after the fact. That is, the unemployment rate for January is usually available in February. Production and income data are reported quarterly and have an even longer lag. Gross production data for January, February, and March is seldom available until May.

Collecting data is only part of the recognition lag. The data must be analyzed and evaluated to ensure that they actually reflect the onset of a problem, such as a business-cycle contraction. This often requires several months of data to document a trend. All of this collecting, measuring, analyzing, and evaluating generates the recognition lag.

Monetary versus Fiscal

The recognition lag is documenting an economic problem and is largely independent of the subsequent corrective policy undertake. That is, identifying the onset of a business-cycle contraction has no connection to whether monetary policy or fiscal policy is eventually used to correct the problem. As, the recognition lag is invariably the same for both monetary policy and fiscal policy.

Other Lags

The recognition lag is one of four policy lags. The other three are decision lag, implementation lag, and impact lag. The first two are termed inside lags and the last is an outside lag.
  • 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.

  • 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.

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Recommended Citation:

RECOGNITION LAG, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: January 18, 2019].


Check Out These Related Terms...

     | policy lags | implementation 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 | leading economic indicators | coincident economic indicators | lagging economic indicators | gross domestic product | unemployment | inflation |


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 | www.whitehouse.gov/omb/ | Congressional Budget Office |


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