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10 - On the Hicksian definition of income in applied economic analysis
- Edited by Roberto Scazzieri, Università degli Studi, Bologna, Italy, Amartya Sen, Harvard University, Massachusetts, Stefano Zamagni, Università degli Studi, Bologna, Italy
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- Book:
- Markets, Money and Capital
- Published online:
- 29 June 2009
- Print publication:
- 08 January 2009, pp 164-182
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Summary
Introductory remarks
In the preface to the first edition of Value and Capital, Sir John Hicks acknowledges that he ‘profited from the constant reminder which [he] had from [Ursula's] work, that the place of economic theory is to be the servant of applied economics’ (Hicks, 1939a: v). There are several aspects of applied economics that benefited from the theoretical analysis that Hicks developed. One of the least noticed was the distinction between flex-price and fix-price markets, and their influence in the shaping of econometric models. We aim to focus on an even narrower question, which raised quite a lot of theoretical discussions in the 1930s and 1940s, but lay dormant in applied economics till the great inflation of the 1970s: the definition of income.
It was not the rate of inflation in that decade that brought the question to life; it was its persistence. The persistence of inflation, as Hicks on many occasions noticed, changed the ‘normal’ long-run rate of interest, making it diverge from the long-run real return to capital. Households started realizing that, had they consumed their total comprehensive income, they might have eaten up part of their wealth. Measuring the propensity to save and the true burden of the public debt became a problem in macroeconomic analysis. It was during those years that household disposable income started being calculated with the so-called ‘Hicksian correction.’
Discussion
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- By Paolo Onofri
- Edited by Francisco Torres, Francesco Giavazzi
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- Book:
- Adjustment and Growth in the European Monetary Union
- Published online:
- 29 January 2010
- Print publication:
- 21 October 1993, pp 311-317
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Summary
Frankel, Phillips and Chinn have written a very useful chapter indeed. In a few pages they give a full documentation of the nominal convergence among the EMS economies. Their goal is very ambitious: to try to measure such an immaterial thing as credibility. Others have already tried, but the authors of this chapter have done it by measuring another immaterial thing: the expected but not materialized re-alignment of the central parities.
Of course, they can work only on clues; nonetheless the results they get are quite reasonable: the fears of realignment have declined in the very recent past, hence the credibility of the exchange rate mechanism (ERM) has increased.
This statement allows the authors to draw the following two conclusions:
(a) differentials in interest rates among the EMS countries mainly depend on the degree of currency integration, and only to a smaller extent on the integration of financial markets;
(b) as the ERM approaches full credibility, predictions of Paul Krugman's target zone model (Krugman, 1991), which seemed to have failed empirical confirmation, can be tested more consistently.
As far as point (b) is concerned, the chapter documents a statistical and econometric procedure which shows that the target zone model predictions are not rejected by actual behaviour. The general analytical design of such an empirical analysis is presented in another publication by the first two authors – Frankel and Phillips (1991) – to which the reader should refer for possible criticism.