Named after English economist Arthur Cecil Pigou (1877-1959), Pigou effect was firmly rooted in the classical school of economics and was subsequently overshadowed by the work of English economist John Maynard Keynes (1883-1946).
The term may be defined as the impact of a change in the money supply on consumption.
Pigou maintained lower prices would encourage consumption, thereby boosting total income and employment. Implicit in the Pigou effect (also known as the real balance effect) was the belief that an improved employment situation was achievable through lower wages.
The effect can be shown in diagrammatic form as a shift in the IS curve.
Also see: IS-LM model
A C Pigou, 'The Classical Stationary State', Economic Journal, vol. Lm (December, 1943), 343-51