The Cantillon Effect of Money Injection through Deficit Spending

Wenli Cheng and Simon Angus (simon.angus@monash.edu)

No 12-12, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper develops a simple dynamic model to study some of the implications of Cantillon’s insight that new money enters an economy at a specific point and that it takes time for the new money to permeate the economy. It applies a process analysis and uses numerical simulations to map out how the economy changes from one period to the next following a money injection. It finds that, within the region of stability, a money injection can generate oscillating changes in real variables for a considerably long period of time before converging back to the initial steady state. It also finds that a money injection benefits first recipients of the new money, but hurts later recipients and savers. Our simulation suggests that in our model savers can lose from a money injection even if they are first recipients of the new money.

JEL-codes: E37 E51 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2012-03
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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