Dynamics

Abstract

“The data which we will release to the press tomorrow show that unemployment rose by three-tenths of a percent last month.” This cryptic sentence in a report from the Labor Department to the White House is the first notice that a downturn may be occurring in the economy. How long will it take for the government to decide to take action to stem the rise in unemployment? Then how long will it take for the economy to respond to the government’s initiative so that unemployment declines again?

Both the decision an dthe effect lag include “recognition” lags, that is, the time from a change in the economy untill the change is recognized . In the decision lag the recognition lag is the time untill policy advisers recognize the change in the economy. In the effect lag the recognition is the time untill consumers and producers realize that policies have been changed. For a historical example of the recognition lag see pp. 8-11 of Tinsley,Garret, and Friar (1978).

Lester Thurow suggested the use of three rather than two types of lags. In his scheme the decision lag of this book is divided into (1) a decision lag and (2) a policy change lag.

For a discussion of the effect lag in macroeconomic model context in Pindyck(1973a).