Stabilization Policy and Lags

Abstract

The effects of the length and variability of lags on the conduct of stabilization policy are studied using linear difference equation models. It is shown that long lags by themselves do not impair the effectiveness of active stabilization policy and in fact require its more vigorous use. Variability in lags does reduce the effectiveness of stabilization policy and requires its more cautious use; the relative performance of alternative policies depends upon whether the variability of lags is confined to the direct effects of policy or occurs in the dynamics of the whole system. The cautious use of active stabilization policy is shown to be always stabilizing relative to performance under an inactive policy.

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