The Pigou effect is an economics term that refers to the stimulation of output and employment caused by increasing consumption due to a rise in real balances of wealth, particularly during deflation.
Wealth was defined by Arthur Cecil Pigou as the sum of the money supply and government bonds divided by the price level. He argued that Keynes' General theory was deficient in not specifying a link from "real balances" to current consumption and that the inclusion of such a "wealth effect" would make the economy more 'self correcting' to drops in aggregate demand than Keynes predicted. Because the effect derives from changes to the "Real Balance", this critique of Keynesianism is also called the Real Balance effect.
Read more about Pigou Effect: History, Integration With Keynesian Aggregate Demand, Why Pigou's Hypothesis Prevents The Liquidity Trap, Kalecki's Criticism of The Pigou Effect, The Pigou Effect and Japan, Government Debt and The Pigou Effect
Famous quotes containing the word effect:
“The whole theory of modern education is radically unsound. Fortunately in England, at any rate, education produces no effect whatsoever. If it did, it would prove a serious danger to the upper classes, and probably lead to acts of violence in Grosvenor Square.”
—Oscar Wilde (1854–1900)