How do inside lags and outside affect monetary policy?

Answer 1

Inside lags refer to the delay between recognizing the need for monetary policy action and the implementation of that action, while outside lags are the time it takes for the implemented policy to affect the economy. These lags can complicate monetary policy effectiveness, as economic conditions may change during the delay, potentially leading to inappropriate or counterproductive responses. Consequently, central banks must carefully consider the timing of their interventions to ensure that policies are responsive and relevant to current economic conditions. The presence of these lags can also lead to uncertainty in predicting the outcomes of policy changes.