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Pigou and Buffer Effects in Monetary Economics
Credit and Capital Markets – Kredit und Kapital, Vol. 21 (1988), Iss. 1 : pp. 92–117
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Anthonie Knoester, Nijmegen
References
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Abstract
Pigou and Buffer Effects in Monetary Economics
This paper discusses the two mainstream monetary views on the direct link between money and real aggregates. The oldest direct link was elaborated by Pigou in 1943 as an alternative to the Keynesian indirect link as formalised in IS-LM models. It is shown how this Pigou effect was elaborated and critised in the postwar period. It is argued that its most important weakness lies in the implicit assumption of monetary equilibrium. The paper suggests that modern disequilibrium analysis provides a far better theoretical foundation for the direct link between money and real aggregates. Such link – being called the buffer effect – fits well into the growing body of economic literature dealing with the so-called buffer stock approach to money.