What are policy lags? Explain the three policy lags faced by the Fed w

What are policy lags? Explain the three policy lags faced by the Fed when implementing monetary policy.

What will be an ideal response?

ANSWER

Policy lags refer to the time between when a shock occurs in an economy and the time when the policy actually affects the economy.
1. Recognition lags refer to the period of time between when a shock occurs and when policymakers, such as the Fed, recognize that the shock has occurred.
2. Implementation lags refer to the period of time between when policymakers recognize that a shock has occurred and when they adjust policy to the shock.
3. Impact lags are the period of time between a policy change and the effect of that policy change on real GDP, employment, inflation, and other economic variables.