TITLE:
Applied Mathematical Theory for Monetary-Fiscal Interaction in a Supranational Monetary Union
AUTHORS:
Bodo Herzog
KEYWORDS:
Differential Equations, Monetary-Fiscal Interaction, Monetary Union Theory
JOURNAL NAME:
Journal of Applied Mathematics and Physics,
Vol.2 No.8,
June
27,
2014
ABSTRACT: I utilize a
differentiable dynamical system á la Lotka-Voletrra and explain monetary and fiscal interaction
in a supranational monetary union. The paper demonstrates an applied
mathematical approach that provides useful insights about the interaction mechanisms
in theoretical economics in general and a monetary union in particular. I find
that a common central bank is necessary but not sufficient to tackle the new
interaction problems in a supranational monetary union, such as the free-riding
behaviour of fiscal policies. Moreover, I show that supranational institutions,
rules or laws are essential to mitigate violations of decentralized fiscal
policies.