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be lessened by a share of the debt taken on by the national government. As a consequence bonds should not be considered as part of net wealth at the macroeconomic level. This implies that there is no way for the government to create a "Pigou effect" by issuing bonds, because the aggregate level of wealth will not increase.
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in the presence of a bequest motive, the public is not fooled into thinking they are richer when the government issues bonds to them, because government bond coupons must be paid from increased future taxation. Therefore, he argued that at the microeconomic level, the subjective level of wealth would
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Other apparent evidence against the Pigou effect from Japan may be its long period of stagnating consumer expenditure whilst prices were falling. Pigou hypothesised that falling prices would make consumers feel richer (and increase spending) but
Japanese consumers tended to report that they preferred
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stimulus to increase output because there is little connection between personal income and money demand. John Hicks thought that this might be another reason (along with sticky prices) for persistently high unemployment. However, the Pigou effect creates a mechanism for the economy to escape the
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because "The adjustment required would increase catastrophically the real value of debts, and would consequently lead to wholesale bankruptcy and a confidence crisis."
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Pigou concluded that an equilibrium with employment below the full employment rate (the classical natural rate) could only occur if prices and wages were sticky.
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724:" neutralizes the Pigou effect, and that theory would then indicate persistent deflationary stagnation (below full employment).
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than Keynes predicted. Because the effect derives from changes to the "Real
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could lower both employment and the price level in unison, an occurrence observed in the
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Please expand the article to include this information. Further details may exist on the
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2002 Kobe
University analysis of the deflationary spiral, argues that an "insatiable
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about whether there is a consensus among modern economists that this effect is real.
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624:(1944). "Professor Pigou on the "Classical Stationary State" A Comment".
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The Pigou effect was first popularised by Arthur Cecil Pigou in 1943, in
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was deficient in not specifying a link from "real balances" to current
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Hough, Louis (June 1955). "An Asset
Influence in the Labor Market".
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caused by increasing consumption due to a rise in real balances of
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might still prevent reversion to natural output levels after a
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to delay purchases, expecting that prices would fall further.
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Liquidity Traps... Is Japan Really
Trapped at the Zero Bound?
230:" would make the economy more "self correcting" to drops in
458:(September 1948). "Price Flexibility and Full Employment".
530:"Managing the Loss: How Pigou Arrived at the Pigou Effect"
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History of the extensions of the original Pigou effect
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Finally, the economy moves to the new equilibrium, at
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561:(1943). "The Classical Stationary State".
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109:Learn how and when to remove this message
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378:Kalecki's criticism of the Pigou effect
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414:Government debt and the Pigou effect
402:might have been expected to end the
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382:The Pigou effect was criticized by
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312:John Hicks
300:depression
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302:. In the
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