If monetary and fiscal policy have fairly long lag times, how can they be effective ways to neutralize the economy?
There are three type of lags:
Recognition Time Lag: It takes a while before we know when the economy is in a recession and it takes a while before we know we are out of a recession. It takes time to gather information about the current state of the economy. So, in essence the government will be 6 months behind the curve, when it comes to trying to jump-start the economy
Action Time Lag: This is the time required between recognizing an economic problem and putting policy into effect. As you can tell from the notes above, the budget process can be long and complicated and politicians rarely ever agree on the right thing to do
Effect Time Lag : It can take time before the changes in policy actually have an effect on the economy.
Needless to say, the lags are both variable ...
This explains the concept of Lags in the Monetary and Fiscal Policy and ways to tackle the lags.