Monetary Policy & Discretionary Fiscal Policy Lags
Unlike the other types of stabilization policy lags, recognition lag is identical for both monetary policy and fiscal policy actions. Intuitively this is obvious, because neither of these countercyclical interventions in the economy will be implemented until a cyclical deviation from the long run growth path has been recognized.
Typically, according to the research that has been conducted, the duration of the recognition lag is estimated to be around 3 months. However, I'd encourage the reader to keep my earlier comments in mind, because there is no objective process of identifying when economic growth has deviated from its trend level, and without an objective start date any estimate of recognition lag duration is rendered subjective and open to debate.
There is also some evidence of differences relating to whether or not the economy is thought to be entering a recession or a boom, with slower recognition of booms meaning that government expansionary fiscal policy (or Federal Reserve monetary policy) tends to be slower off the blocks than contractionary fiscal policy.
Recognition of Boom Periods in the Economy
Whilst appropriate policy may be delayed somewhat following the failure to recognize a downturn in the economy, that delay may be much longer when it comes to recognizing that economic growth has accelerated beyond its sustainable long run growth path.
Politicians have in-built incentives to capitalize on the good times because they know that their popularity depends in large part on presiding over a thriving economy with low levels of unemployment. This can easily lead to cognitive bias, whereby information can be innocently (or deliberately) misinterpreted in a favorable light.
Hindsight is perfect, but it is difficult to believe that the economic boom years in the United States and other western countries in the early 2000's could have been innocently misinterpreted. It would be extremely difficult to reconcile the rapid inflation of house prices, right up to 2007, with an oversight by our political elites. If this was an innocent oversight, or miscalculation, then we have to acknowledge that the recognition lag can last for several years even in the face of cold hard data that records unprecedented housing and real estate booms!
Neither fiscal policy nor monetary policy was used to cool down the economy in the years running up to the 2007-2008 financial crisis, so it does seem that there is some sort of recognition problem at play when the economy is growing too quickly.
There are reasonable grounds to be a little skeptical of any research that suggests how long it takes for the necessary economic data to be collected and analyzed before any discernible deviation of the economy from its long run growth path can be confirmed. Political forces may well interfere with this determination, but in any case it certainly takes at least a few months before anything can be determined.
There are, as stated at the outset, cases whereby there is a zero lag with regard to recognizing a disturbance to the economy. For example, the lockdowns imposed by the government in response to the Covid-19 pandemic came with an anticipation of severe economic disruption, and we could even argue in this example that the recognition lag was negative. Any foreseen disruptions are predicted ahead of time, with positive lags only relevant starting with what decision to take regarding suitable mitigating action.
Nothing has been written in this article about the desirability of countercyclical fiscal policy (or monetary policy), and it is simply assumed that such action is a positive thing. This, however, is not at all necessarily the case. There are many occasions in which it is best for the government to do nothing at all, and let market forces do their thing because a self-correction may be least disruptive. That will be discussed more in my article about operational lag.