Describe "inside lag", "outside lag", "Lucas critique", and "time inconsistency of economic policy".

Describe "inside lag", "outside lag", "Lucas critique", and "time inconsistency of economic policy".

Expert Solution

Inside lag:- Inside lag is the amount of time a government or a central bank takes to respond to a shock in the economy. It is the delay in the implmentation of fiscal policy or monetary policy.

Outside lag:- Outside lag is the amount of time it takes for a govenment or central bank's actions, in the form of either monetary or fiscal policy, to have a noticable effect on the economy.

Lucas critique:- The Lucas critique, named for Robert Luca's work on macroeconomic policymaking, argues that it is naive to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.

Time inconsistency of economic policy:- Time-inconsistency describe situations where, with the passing time, policies that were determined to be optimal yesterday are no longer perceived to be optimal today and are not implemented. However, time-inconsistency can affect more than just the average rate of inflation that prevails in the economy.

Rahul Sunny answered 1 year ago

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