Cantillon Effect

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Cantillon Effect

Post  kosovohp on Fri Oct 29, 2010 11:23 pm

Addressing the mercantilist belief that monetary intervention could cause a perpetually favorable balance of trade, Cantillon developed a specie-flow mechanism foreshadowing future international monetary equilibrium theories.[71] He suggested that in countries with a high quantity of money in circulation prices will increase and therefore become less competitive in relation to countries where there is a relative scarcity of money.[72] Thus, Cantillon also held that increases in the supply of money, regardless of the source, cause increases in the price level and therefore reduce the competitiveness of a particular nation's industry in relation to a nation with lower prices.[73] However, Cantillon did not believe that international markets tended toward equilibrium, and instead suggested that government hoard specie to avoid rising prices and falling competitiveness.[71] Furthermore, he suggested that a favorable balance of trade can be maintained by offering a better product and retaining qualitative competitiveness.[74] Cantillon's preference towards a favorable balance of trade possibly stemmed from the mercantilist belief in exchange being a zero-sum situation, in which one party gains at the expense of another.[75]

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