Catherine Mann’s Challenge to the Standard 18-24 Month Lag Estimate of Monetary Policy Changes

Catherine Mann, a member of the Monetary Policy Committee at the Bank of England, recently gave a speech challenging the standard 18-to-24-month estimate of how long policy changes take to filter through. She argued that financial markets have absorbed a substantial degree of the tightening to date, and that the sequence of shocks and embedding of inflation risks a troubling change in expectations formation via an increase in the share of backward-looking participants in the real economy. This article will explore Catherine Mann’s challenge to the standard 18-to-24-month lag estimate, and discuss the implications of her argument on the implementation of monetary policy.

The Standard 18-24 Month Lag Estimate

The standard 18-to-24 month lag estimate of how long policy changes take to filter through is a key theme of monetary policymaking. Ben Broadbent, the deputy governor of the Bank of England, said in a speech at the end of 2021 that a change in interest rates has its peak impact on inflation only after a significant delay — probably eighteen months or more. This is supported by literature such as Cloyne and Hurtgen (2016) and Cesa-Bianchi, Thwaites and Vicondoa (2020), which suggest that the peak effect of changes in UK monetary policy takes well over two years to come through.

Catherine Mann’s Challenge

Since arriving at the Bank of England in September 2021, Catherine Mann has been one of the Monetary Policy Committee’s most hawkish members. In her recent speech, she argued that the standard 18-to-24-month lag estimate may be too long, and that financial markets have absorbed a substantial degree of the tightening to date. She also suggested that the sequence of shocks and embedding of inflation risks a troubling change in expectations formation via an increase in the share of backward-looking participants in the real economy.

Implications for Monetary Policy

Mann’s argument has significant implications for the implementation of monetary policy. If the standard 18-to-24-month lag estimate is too long, it could mean that central banks are not taking action soon enough to prevent inflationary waves. This could lead to a situation where central banks are forced to take drastic action, such as rapid monetary policy tightening, which could cause massive unemployment. A more accurate estimate of the delay could improve the implementation of monetary policy in normal times.

Related Facts

• Central banks around the world have implemented rapid monetary policy tightening in the past year-and-a-bit.
• Mann has argued for further tightening and sooner rather than later.
• The standard 18-to-24-month lag estimate may be too long.
• A more accurate estimate of the delay could improve the implementation of monetary policy.

Key Takeaway

Catherine Mann recently argued that the standard 18-to-24-month lag estimate of how long policy changes take to filter through may be too long. This could have significant implications for the implementation of monetary policy, as a more accurate estimate of the delay would improve the implementation of monetary policy in normal times.

Conclusion

Catherine Mann’s challenge to the standard 18-to-24-month lag estimate of how long policy changes take to filter through could have significant implications for the implementation of monetary policy. If her argument is correct, it could mean that central banks are not taking action soon enough to prevent inflationary waves, and a more accurate estimate of the delay would improve the implementation of monetary policy in normal times.