In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
, the inside lag (or inside recognition and decision lag) is the amount of time it takes for a government or a
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
to respond to a shock in the economy. It is the delay in implementation of a
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variabl ...
or
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...
. Its converse is the
outside lag (the amount of time before an action by a government or a central bank affects an economy). The inside lag comprises the recognition lag (the time taken to recognize the shock) and the decision lag (the time taken to decide on and pursue a response).
The inside lag is generally a more severe problem for fiscal policy (government spending and taxation policy) than for monetary policy. Monetary policy is conducted by a
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
that is devoted substantially to monitoring and responding to economic shocks, whereas fiscal policy is conducted by a law-making body that has many other issues to confront as well as a highly deliberative process with which to confront them. Nevertheless, a central bank may often experience a substantial recognition lag prior to its becoming clear just what the latest economic figures imply for policy needs. Indeed, even after a central bank implements a policy response, its critics may still argue that it recognized the situation incorrectly.
References
Further reading
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Macroeconomic policy
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