Pigou effect

The Pigou effect maintains a budgetary stimulus effect of falling wages and prices. Due to a fall in the general level of prices in a deflationary trend, the financial assets of citizens is more valuable and the total assets higher than desired, so that the savings decreases. With the higher purchasing power of monetary assets climb aggregate demand. This effect was first described by Arthur Cecil Pigou and is represented by the followers of a deflationary policy, especially the reindeer and their lobbyists in economic policy.

History

Arthur Cecil Pigou, the arch rival of John Maynard Keynes in all aspects of economic and employment theory, since the end of the 20s, and especially in his work The Theory of Unemployment (1933 ) examined the elasticity of labor demand and was for wage cuts to increase the employment occurred. This led Pigou unemployment significantly to the rigidity of wages back that would reinforced by the social legislation and the unemployment benefit. After Keynes in his General Theory of Employment, Interest and Money, denied the benefits of wage cuts, Pigou shifted his interest to a model that would combine the money wages over the interest of employing such a way that again, decreasing wages to rising employment would have. Under the influence of Nicholas Kaldor himself Pigou already supported in his work Employment and Equilibrium (1941 ) to the developed by John Hicks IS- LM model, with which the theories of Keynes have been reduced to a neoclassical synthesis. In this work and in his article The Classical Stationary State (1943 ), he developed the later designated as Pigou effect thesis of the economy and employment -promoting effect of deflation.

Thesis and justification

Pigou expected of falling prices, a rising consumer demand, particularly because save the owners of government bonds by their real growth in assets less.

Keynes had argued against wage cuts because falling money wages lead to falling prices, deflation has a slump in investment result and nominal wage reductions, real wages could even rise. Pigou, however, demanded that wages should fall until unemployment would be overcome. The fall of prices would increase the real wealth of the holders of government bonds and increase the purchasing power of the money supply. This leads to a declining propensity to save and rising consumer spending, thereby revive the economy.

Criticism

Especially Michal Kalecki contradicted in The Economic Journal ( April 1944 ) with the argument that winning the rentiers and creditors corresponds to a loss of the debtor. Overall, I'm only to the extent of the gold reserves to a real growth in assets. A strong deflation of wages and prices would increase the real burden of debt and disastrous end in extensive bankruptcies and loss of confidence. Even if the workers would be willing to continuing wage cuts, the government under pressure from the entrepreneur should have a wage freeze.

The Pigou effect is largely based on the net public debt, which allows the private sector a corresponding net financial assets mainly in government bonds. The wealth effect from the increase in value of circulating banknotes and coins is negligible according to Paul Krugman.

Comparable concepts

Allen similar concepts have in common that they claim as the Pigou effect an economic revitalizing effect of the deflation that would result in a crisis again to economic balance and full employment.

Real balance effect

When wealth effect (real balance effect) increases the real balances by falling prices above or falls by a rising price level below the desired cash balances. In the IS- LM model, it comes at lower prices to a rightward shift of the LM curve and the point of intersection with the IS curve. The real balance effect is the basis for the effects named after Pigou, Keynes and Patinkin.

Keynes effect

The so-called Keynes effect comes from the neoclassical synthesis of John R. Hicks and is in stark contrast to the views of Keynes to the effect of deflation on the economy. He describes an indirectly acting on the investment over the securities market effect on the demand for goods. Due to the excessive falling prices cash holdings ( transaction and speculative fund) increase in the demand for securities, so that interest rates fall and investment to take. In the IS- LM model, the IS curve shifts to the right, income and employment rise.

Real cash accounting or Patinkin effect

The approach of Don Patinkin is known as an extended real balance effect or real balance effect entertainment. The real cash balances will be adjusted according to a price change by increasing or decreasing outputs to the desired cash balances. So Falling prices lead by the increased real balances to rising demand for consumer goods and securities and increased investment. Here, Don Patinkin considers the cash balance benefit under the concept and it is a balance of marginal utility of holding cash sought by the marginal utility of additional consumption or investments.