Cantillon Effect

Cantillon's analysis

Cantillon wrote his Essay on the Nature of Trade in General around 1730, and it was published in 1755, after his death. He accepted the basic idea of the quantity theory, that more money raises prices, but argued that the effect depends on where the new money enters. When a mine produces new gold, for example, the incomes of mine owners and miners rise first, and the prices of the goods they buy rise first, while people on fixed incomes bear the higher prices later. He explained that money flowing in through a trade surplus raises prices through a different channel. Bordo (1983) judged Cantillon's monetary theory a pioneering analysis that treated both the distributional effects of money inflows and the adjustment of the balance of payments, and Blaug (1997) likewise stressed Cantillon's originality in the history of economic thought. The term Cantillon effect was coined later by economists who named it after him.

From Hume to Hayek

In Of Money, Hume (1752) noted that when money increases, prices do not rise at once, and in the interval industry is stimulated. Cantillon and Hume both held that even if money changes only prices in the long run, it affects the real economy during the transition. This view complements the simple proportionality of the quantity theory of money. In Prices and Production, Hayek (1931) developed a business cycle theory in which credit expansion enters certain sectors first and distorts relative prices and the structure of production, drawing heavily on the Cantillon effect. Thornton (2006) argued that Cantillon's analysis already contained an account of the causes of business cycles. In modern theory, limited participation models such as Grossman and Weiss (1983), which assume that only some households take part in financial markets, formalized the idea that monetary shocks have different effects depending on their channel. Williamson (2008) analyzed the distributional effects of monetary policy with a segmented markets model.

Modern monetary policy and distribution

After the 2008 financial crisis, central banks bought assets on a massive scale through quantitative easing, and the Cantillon effect drew renewed attention. The Bank of England (2012) found that its asset purchases pushed up stock and bond prices, with the benefits concentrated among households holding large financial assets, since the top 5% of UK households held about 40% of household financial assets. Coibion and colleagues (2017), however, showed with US data that contractionary monetary policy actually increases income and consumption inequality, cautioning against the view that easy policy always widens inequality. Doepke and Schneider (2006) found that unexpected inflation redistributes wealth from rich older households holding nominal assets to young middle-class households in debt. The heterogeneous agent New Keynesian (HANK) model of Kaplan, Moll and Violante (2018) found that monetary policy works more through indirect effects on employment and income than through direct interest rate effects. The Cantillon effect is thus the prototype for modern research on whom monetary policy affects first, and by how much.

FAQ

What is the Cantillon effect in simple terms?

Because newly created money does not reach everyone at the same time, those who get it first can spend it before prices rise and gain, while those who get it later must pay already higher prices and lose.

Does quantitative easing increase inequality because of the Cantillon effect?

Some analyses find that quantitative easing raises the prices of assets such as stocks and real estate, benefiting asset holders first. But it also boosts employment and wages by supporting the economy, so studies reach mixed conclusions about its overall distributional effect.

Sources reviewed: 2026-10-26

References

1. Hume, D. (1752). Of money. In Political Discourses. Edinburgh: A. Kincaid and A. Donaldson.
2. Cantillon, R. (1755). Essai sur la nature du commerce en général. London [Paris]: Fletcher Gyles.
3. Hayek, F. A. (1931). Prices and Production. London: Routledge.
4. Bordo, M. D. (1983). Some aspects of the monetary economics of Richard Cantillon. Journal of Monetary Economics, 12(2), 235–258.
5. Grossman, S. J., & Weiss, L. (1983). A transactions-based model of the monetary transmission mechanism. American Economic Review, 73(5), 871–880.
6. Blaug, M. (1997). Economic Theory in Retrospect (5th ed.). Cambridge: Cambridge University Press.
7. Doepke, M., & Schneider, M. (2006). Inflation and the redistribution of nominal wealth. Journal of Political Economy, 114(6), 1069–1097.
8. Thornton, M. (2006). Cantillon on the cause of the business cycle. Quarterly Journal of Austrian Economics, 9(3), 45–60.
9. Williamson, S. D. (2008). Monetary policy and distribution. Journal of Monetary Economics, 55(6), 1038–1053.
10. Cantillon, R. (2010). An Essay on Economic Theory (C. Saucier, Trans.; M. Thornton, Ed.). Auburn, AL: Ludwig von Mises Institute.
11. Bank of England. (2012). The distributional effects of asset purchases. Quarterly Bulletin, 52(3), 254–266.
12. Coibion, O., Gorodnichenko, Y., Kueng, L., & Silvia, J. (2017). Innocent bystanders? Monetary policy and inequality. Journal of Monetary Economics, 88, 70–89.
13. Kaplan, G., Moll, B., & Violante, G. L. (2018). Monetary policy according to HANK. American Economic Review, 108(3), 697–743.