Conceptual Columns

What is the Cantillon effect?


Cantillon effect explains how changes in the supply of money in an economy can affect the prices of different goods in different proportions. This is because the real purchasing power of individuals is not affected uniformly by the changes in money supply. The theory was proposed by Richard Cantillon, an Irish-French economist, as a counter to John Locke’s crude quantity theory of money — which saw prices of all goods being affected proportionately by changes in money supply. Cantillon proposed the idea to argue that the differential effect of changes in the money supply on prices leads to booms and busts in the economy.

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Printable version | Nov 24, 2020 12:36:23 PM |

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