Identify the three main types of policy lags and explain why they complicate stabilization policy.

• A. Recognition lag, implementation lag, and impact lag; lags can cause overshooting or mistiming.
• B. Short-term lag, medium-term lag, long-term lag; lags always make stabilization smoother.
• C. Transmission lag, policy lag, evaluation lag; lags always reduce accuracy.
• D. Forecast lag, data lag, reporting lag; lags are irrelevant to policy.

Answer: (A)

Timing matters for stabilization policy. The three main lags are recognition lag, implementation lag, and impact lag. Recognition lag is the delay between when economic conditions actually change and when policymakers notice and acknowledge the problem, a consequence of data collection and revisions. Implementation lag is the time between deciding on a policy and the policy actually taking effect; this is especially long for fiscal measures that require legislation or for monetary actions that must pass through channels before affecting the economy. Impact lag is the delay between when the policy starts influencing conditions and when the results show up in output, employment, and prices.

These lags complicate stabilization because actions respond to conditions that are already evolving. By the time a policy begins to influence the economy, the situation may have moved, causing the policy to be mistimed or even overshoot—being too little, too late, or too strong. The exact magnitude and timing of the effects are uncertain, adding another layer of difficulty in tuning stabilization efforts.

The other options don’t fit because they either use nonstandard categories or make incorrect claims, such as lags always smoothing stabilization or being irrelevant to policy.