Understanding the Cantillon Effect
The Cantillon Effect, named after Richard Cantillon, refers to the changes in relative prices and economic outcomes resulting from a change in the money supply.
It focuses on the distribution and diffusion of newly created money within an economy, highlighting its uneven impact on prices, wages, and inflation.
The Ripple Effect of Money Supply Expansion
The effect recognizes that when the money supply increases, those with direct access to the new money benefit first.
This allows them to allocate the funds in various ways, such as repaying debts, investing in assets like stocks, or making capital purchases.
As a result, these actions can drive up prices and contribute to inflation.