Pigou effect

In economics, the Pigou case is the stimulation of output & employment caused by increasing consumption due to a rise in real balances of wealth, especially during deflation. The term was named after Arthur Cecil Pigou by Don Patinkin in 1948.

Real wealth was defined by Arthur Cecil Pigou as the summation of the money supply together with government bonds divided up by the price level. He argued that Keynes' General Theory was deficient in not specifying a connective from "real balances" to current consumption and that the inclusion of such a "wealth effect" would do the economy more "self correcting" to drops in aggregate demand than Keynes predicted. Because the effect derives from refine to the "Real Balance", this critique of Keynesianism is also called the Real Balance effect.

Kalecki's criticism of the Pigou effect

The Pigou effect was criticized by Michał Kalecki because "The adjustment required would put catastrophically the real proceeds of debts, and would consequently lead to wholesale bankruptcy and a confidence crisis."