Should the Fiscal Authority Avoid Implementation Lag?

Abstract

Implementation lags are a concern of policymakers as they may reduce the efficacy of fiscal policy. Using a standard New Keynesian model with an effective lower bound on the nominal interest rate, we compare the impacts of fiscal stimulus on output across various lengths of implementation lag. We show that despite concerns among policymakers, implementation lags may enhance the efficacy of government purchases on output when the economy is caught in a liquidity trap.