What Is the Time Lag in Monetary or Fiscal Policy?

Time lag refers to how long it takes for a change in monetary or fiscal policy to affect the economy and spending, and the specific amount of time is not easily predictable, notes the Federal Reserve Bank of San Francisco. For monetary policy, interest rates are affected, while government spending and taxation are affected with fiscal policy.

Although time lags vary, it may take 9 to 12 months for monetary policy's effects to be seen and 1 to 5 years for fiscal policy's effects to be seen, states EconEdLink. The reason for the significant time difference is that Congressional approval is needed first for fiscal policy changes, and this is in addition to the time it takes for individuals to pay the new tax rates as well. The lag for monetary policy is shorter since individuals can take action based on changes in interest rates rather quickly.