ABSTRACT
This chapter provides a theoretical analysis of the Cantillon effect. It defines this phenomenon and its components, and discusses its essence, which is not the unexpected change in money supply, but uneven change. The chapter also presents the relationship between the Cantillon effect and the non-neutrality of money, as well as the changes in money supply in general. It shows that unequal changes in money supply result in different distribution effects and, consequently, price effects. The chapter argues that the latter are much more important, because the distribution of income in itself cannot affect social well-being and the allocation of factors of production is determined by the price structure. In particular, these effects may lead to a business cycle – the increase in money supply through the credit channel distorts the interest rate that is responsible for the intertemporal allocation. Thus, the chapter concludes that the Cantillon effect is a foundation of the Austrian Business Cycle Theory.
