Keynes effect

The so-called Keynes effect maintains an economic revitalizing effect of the deflation by the declining with the adaptation of holding cash interest. The name by Keynes is based on the neoclassical synthesis of John R. Hicks and is in stark contrast to the views of John Maynard Keynes on the effect of deflation on the economy. It is an indirectly acting on the investment over the securities market effect on the demand for goods. Due to the excessive falling prices cash holdings 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.

Thesis and justification

Due to falling prices climb the real money holdings ( transaction and speculative fund) on the scope of the desired cash holdings and households and companies are trying by higher demand in the bond market to reduce the excess cash balances again. It comes with the higher demand to an increase in bond prices and, as a result of falling interest rates. When interest rates fall, rising investment demand for goods and employment.

In a rising price level results in the exact opposite effect. In the IS- LM model, the price level is not an independent determinant of overall economic demand for goods. Therefore, price changes have no direct impact on the demand for goods. However, acts a price change in the money market. According to the money market equilibrium condition M / P = L (where M / P is the real money supply and L for macroeconomic money demand ) draws a price level increase, a reduction in real money supply by itself. This results in an excess demand in the money market. The economic agents are now ready to make liquid securities to meet their demand for money. However, a supply surplus on the securities market attracts assumed to ( Market value = nominal interest rate / market rate ) falling prices and rising interest rates by itself.

The interest rate is now but a determinant of overall economic demand for goods and causes a corresponding increase or decrease in net private investment. This results in an increase or decrease in demand for goods and thus an increase or decrease of the overall economic equilibrium income, as the supply of goods assumed to flexibly adapt the demand for goods.

Price level changes cause therefore seen isolated äquiproportionale interest rate changes.

The Keynes effect is referred to as indirectly acting real balance effect, as the price changes affect the goods market only through the money market, and then the transmission channel of interest.

Special cases

The Keynes effect is ineffective when the private investment demand is completely zinsunelastisch, so do not respond to changes in interest rates. Here changes are only in the money market to see (capital case ).

Next is an increase in real money supply by lowering the price level has no effect on investment demand, if we are already in a liquidity trap. The excess supply in the money market now flows entirely in the speculative funds because, as economic agents want to hold only money and no security on the basis of pessimistic interest rate expectations.

Criticism

The thesis of a konjunkturbelebenden effect of deflation is based on the fall of the prices falling nominal interest rates. However, it comes with the fall of prices to rising real interest rate, which results from the nominal interest rate plus the rate of deflation. On investment and the economy, the real interest rate is crucial. According to Keynes, deflation is devastating for employment because the entrepreneur restrict production if they continue to expect falling wages and prices.

The wealth effect from the increase in value of the money supply is negligible according to Paul Krugman. The increase in purchasing power of the money supply by deflation are often compared to larger losses as the real estate sector, as in the current financial crisis. In the world economic crisis of 1929-33, it came through the deflation to a huge fall in stock market prices. Falling prices also devalue all investments in real estate and with the declining sales proceeds of their produce, farms and factories.

The name of the effect according to Keynes relies only on a unique and highly restricted in the same paragraph statement that a reduction of wages and prices lead to lower nominal interest rates and could favor the investment. Basically, Keynes was of the view that deflation WOULD negative impact on economic activity, employment and investment.

Comparable concepts

Allen similar concepts have in common is that, in contrast to the view of Keynes on the krisenverschärfenden consequences of deflation claim as the Keynes effect the economy totally a revitalizing effect of the deflation that would result in a crisis again to economic balance and full employment.

The 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.

The Pigou effect

The Pigou effect is similar in its mode of action in general the real balance effect, but particularly emphasizes the wealth effect for the holders of government bonds, where the feeling is caused by the decline in the price level to be prosperous. Therefore, increase their consumption and hence the quantity of goods demanded in an economy.

The 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 a rising or falling consumer demand to the desired cash balances. So Falling prices lead by the increased real balances to rising demand for goods. 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.