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In economics, the Pigou effect is the stimulation of output and employment caused by increasing consumption due to a rise in real balances of wealth, particularly during deflation. The term was named after Arthur Cecil Pigou by Don Patinkin in 1948.[1][2][3]
Real wealth was defined by Arthur Cecil Pigou as the summation 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.
- ^ Patinkin, Don (September 1948). "Price Flexibility and Full Employment". The American Economic Review. 38 (4): 543–564. JSTOR 591.
- ^ Hough, Louis (June 1955). "An Asset Influence in the Labor Market". Journal of Political Economy. 63 (3): 202–215. doi:10.1086/257665. JSTOR 1825073. S2CID 154553746.
- ^ Takami, Norikazu (April 2011). "Managing the Loss: How Pigou Arrived at the Pigou Effect". HOPE Center Working Papers. Archived from the original on 2019-05-14. Retrieved 2014-07-15.