In economics, the Pigou effect is the stimulation of output and employment caused by increasing consumption due to a rise in real balances of wealth, particularly during deflation.
[1][2][3] Real wealth was defined by Arthur Cecil Pigou as the summation of the money supply and government bonds divided by the price level.
[4] He had proposed the link from balances to consumption earlier, and Gottfried Haberler had made a similar objection the year after the General Theory's publication.
The Pigou effect was criticized by Michał Kalecki because "The adjustment required would increase catastrophically the real value of debts, and would consequently lead to wholesale bankruptcy and a confidence crisis.
"[6] If the Pigou effect always operated strongly, the Bank of Japan's policy of near-zero nominal interest rates might have been expected to end the Japanese deflation of the 1990s sooner.