Posted by: Michael Mandel on March 11
We all know that monetary policy takes 12-18 months to have its full effect on the economy. So the first rate cut of 50 basis points in September 2007 is only now working its way through the economy. (Here’s a good 2006 post by Mark Thoma on lags in monetary policy. He cites a paper which says
after an expansionary monetary policy shock…output, consumption, and investment respond in a hump-shaped fashion, peaking after about one and a half years and returning to preshock levels after about three years
Here’s the question: Do the same lags apply to the TSFL? In other words, is this medicine expected to work right away? Or is Bernanke and company fertilizing the next boom? This is a very important question. How will we know if the TSFL is working or working with a delayed impact?
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