Pigou effect

The Pigou effect is an economics term that refers to the stimulation of output and employment. It is caused by increasing consumption due to a rise in real balances of wealth. It often happens 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 explained that Keynes' General theory was incomplete because it was not clarifying a link from "real balances" to current consumption. He also pointed out that it didn't include 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 is also called the Real Balance effect.

Category:Economics