The aim of the paper is to find an empirical approximation for the theoretical definition of income proposed by John Hicks. According to his definition, income is “the maximum amount of money which the individual can spend this week and still expect to be able to spend the same amount in real terms in each ensuing week”. In particular, we examine the feasibility of the above definition in its application to the measurement of household disposable income, on the one side, and to the evaluation of the return of both financial and real capital asset, on the other. All the data used in the empirical investigation refer to the Italian economy over the sample period 1970 to 2003. As regards household disposable income a model allowing for the “Hicksian correction“ is empirically tested and we find that consumers’ perception of the influence of inflation upon the purchasing power of their wealth is not negligible, but incomplete. In other words, households perceive that there is a source of variability in their disposable income which depends on the size of their wealth and on the rate of inflation, without being able to define its exact impact. The results also suggest that sensitivity to inflation changes over the period under consideration. Inflation was a surprise in the 1970s, remaining in the double-digit range for most of the time, and the Hicksian correction significantly affects disposable income. By the 1980s inflation was not a surprise any more and it started declining, thus the role played in the 1970s by the Hicksian correction might have been substituted in subsequent decades by other factors, such as an effort to avoid the so-called “fiscal illusion” attached to the size of the public debt. We also explore the implications of Hicks’s income concepts for the evaluation of the financial wealth of households and firms, assuming that, differently from households, firms are likely to evaluate their financial wealth in terms of the prerequisite of “maintaining capital intact”. If so differentiated, the definition of income highlights the non-neutrality of inflation and the existence of a wedge between return to the household claims on the capital of the firms and the return to capital for the firms. In other words, the Hicksian correction of the income definition may shed light on the divergence between investment and saving decisions.
On the Hicksian definition of income in applied economic analysis
ONOFRI, PAOLO;STAGNI, ANNA
2008
Abstract
The aim of the paper is to find an empirical approximation for the theoretical definition of income proposed by John Hicks. According to his definition, income is “the maximum amount of money which the individual can spend this week and still expect to be able to spend the same amount in real terms in each ensuing week”. In particular, we examine the feasibility of the above definition in its application to the measurement of household disposable income, on the one side, and to the evaluation of the return of both financial and real capital asset, on the other. All the data used in the empirical investigation refer to the Italian economy over the sample period 1970 to 2003. As regards household disposable income a model allowing for the “Hicksian correction“ is empirically tested and we find that consumers’ perception of the influence of inflation upon the purchasing power of their wealth is not negligible, but incomplete. In other words, households perceive that there is a source of variability in their disposable income which depends on the size of their wealth and on the rate of inflation, without being able to define its exact impact. The results also suggest that sensitivity to inflation changes over the period under consideration. Inflation was a surprise in the 1970s, remaining in the double-digit range for most of the time, and the Hicksian correction significantly affects disposable income. By the 1980s inflation was not a surprise any more and it started declining, thus the role played in the 1970s by the Hicksian correction might have been substituted in subsequent decades by other factors, such as an effort to avoid the so-called “fiscal illusion” attached to the size of the public debt. We also explore the implications of Hicks’s income concepts for the evaluation of the financial wealth of households and firms, assuming that, differently from households, firms are likely to evaluate their financial wealth in terms of the prerequisite of “maintaining capital intact”. If so differentiated, the definition of income highlights the non-neutrality of inflation and the existence of a wedge between return to the household claims on the capital of the firms and the return to capital for the firms. In other words, the Hicksian correction of the income definition may shed light on the divergence between investment and saving decisions.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
