Cantillon effect
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
The Cantillon effect is named after Richard Cantillon (c. 1730). It says that new money does not reach everyone at the same time. Those who receive it first, such as banks, financial firms and owners of assets, can spend or invest it before prices rise. Those who receive it last, such as wage earners, face higher prices before their incomes catch up. So new money shifts wealth between groups, not just the price level.
Example
When a central bank carries out quantitative easing (QE), it creates money to buy bonds. The money first reaches financial markets, so share and property prices rise. Asset owners gain early. Ordinary workers gain little, which is why the effect is used to link QE with asset-price inequality.
Don't confuse with
- Quantity theory of money (MV = PY): it looks at how total money affects the overall price level. The Cantillon effect is about who gets the new money first and who gains or loses.
Related concepts
- Monetarism
- Chicago school
- Adaptive expectations
- Rational expectations
- Lucas critique
- Real business cycle theory
- Tinbergen rule
- Austrian school
- Economic calculation problem
- Supply-side economics