effect creates a mechanism for the economy to escape the trap: As unemployment rises, the price level drops, which raises real balances, and thus consumption rises, which creates a different set of IS-curves on the IS-LM diagram, intersecting the LM curves above the low interest rate threshold of the liquidity trap. Finally, the economy moves to the new equilibrium, at full employment. Pigou concluded that an equilibrium with employment below the full employment rate (the classical natural rate) could only occur if prices and wages were sticky. Kalecki's criticism of the Pigou effect The Pigou effect was criticized by Michał Kalecki because "The adjustment required would increase catastrophically the real value of debts, and would consequently lead to wholesale bankruptcy and a confidence crisis." The Pigou effect and Japan If the Pigou effect always operated strongly, the Bank of Japan's policy of near-zero nominal interest rates might have been expected to end the Japanese deflation of the 1990s sooner. Other apparent evidence against the Pigou effect from Japan may be its long period of stagnating consumer expenditure whilst prices were falling. Pigou hypothesised that falling prices would make consumers feel richer (and increase spending) but Japanese consumers tended to report that they preferred to delay purchases, expecting that prices would fall further. Government debt and the Pigou effect Robert Barro argued that due to Ricardian equivalence in the presence of a bequest motive, the public is not fooled into thinking they are richer when the government issues bonds to them, because government bond coupons must be paid from increased future taxation. Therefore, he argued that at the microeconomic level, the subjective level of wealth would be lessened by a share of the debt taken on by the national government. As a consequence bonds should not be considered as part of net wealth at the macroeconomic level. This implies that there is no way for the government to create a "Pigou effect" by issuing bonds, because the aggregate level of wealth will not increase. See also Keynes effect References External links History of the extensions of the original Pigou effect into more generalized "Wealth effects". Liquidity Traps... Is Japan Really Trapped at the Zero Bound? 2002 Kobe University analysis of the deflationary spiral, argues that an "insatiable liquidity preference" neutralizes the Pigou effect, and that theory would then indicate persistent deflationary stagnation (below full employment). Paul Krugman's description of a liquidity