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Lags in Monetary Policy with the TSFL

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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Reader Comments

Joe Cushing

March 16, 2008 07:33 AM

I would say that the same lags to apply for the same macroeconomic effects. There is the additional effect of maybe keeping some banks from going under. This part will work right away.

Joe Cushing

March 17, 2008 10:31 PM

I was about to take back the 2nd part of my comment but I see I used the word "some."

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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