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Fisher effect in tax competition

 
 
kacius
 
Reply Sat 16 Mar, 2013 04:39 pm
Hello,
am asking you Check to see if this is logical, true and correct computes


(1+ i)=(1+ ρ)(1+ π)

we have Fisher equation :

i=ρ+π+ρπ (1)

The FOC of firm's optimization problem in tax competition model of Zodrow and Mieszkowski (1986):

f'(k)= ρ+t (2)

On a :

ρ=i-π (3)

replace (3) in (2), we obtain :

f'(k)= i-π+t (4)

And replace (1) in (4), we obtain :

f'(k)=ρ+π+ρπ-π+t=ρ+ρπ+t=(1+π)ρ+t

⟹ f'(k)=(1+π)ρ+t (5)

Thank you
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Kolyo
 
  1  
Reply Sat 16 Mar, 2013 08:07 pm
@kacius,
Quote:

i=ρ+π+ρπ (1)

ρ=i-π (3)


Sorry, the derivation isn't correct. (1) and (3) can't both be right.
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Kolyo
 
  1  
Reply Sat 16 Mar, 2013 09:04 pm
@kacius,
While we're on the subject I might just add that rather than insult Irving Fisher by calling THIS the Fisher equation:

i=ρ+π

...they might just as well have called THIS the Fisher equation:

MV = PY
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