Abstract

Time Lags in Monetary Policy

Theoretical research shows that the frequently observed time lags in monetary policy can be attributed to cause which can be manipulated by policy measures so that such time lags need not be accepted as inevitable, but can be shortened. The recognition lag can be shortened by the use of early indicators, that is by watching labour market statistics, incoming orders and delivery dates at the beginning of an upswing, and by watching the incoming orders of the capital goods industry at the beginning of a downswing. Measures which suggest themselves for reducing the decision lag are automatic mechanisms which make monetary policy less dependent on political influences. Conflicts between home trade and foreign trade objectives, which frequently delay monetary policy decisions, can be eliminated by early exchange rate adjustments or flexible exchange rates. The intermediate lag can be shortened by more stringent rediscount quotas, the extension of open market policy to the capital market and nonbankers, and by safeguards against external economic influences. The liquidity theory of money offers points of departure for shortening the outside lag - inclusion of credits in minimum reserves calculations, credit ceilings, regulation of share issues by taxation, and minimum reserve requirements for financial intermediaries. The attempts made hitherto to quantify the overall time lag in monetary policy are problematical for various reasons, in particular because with many computation methods the later monetary policy is put into effect, the time lag erroneously appears to be all the shorter.