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Applied Mathematical Theory for Monetary-Fiscal Interaction in a Supranational Monetary Union

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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.
Cite this paper
Herzog, B. (2014) Applied Mathematical Theory for Monetary-Fiscal Interaction in a Supranational Monetary Union. Journal of Applied Mathematics and Physics, 2, 737-744. doi: 10.4236/jamp.2014.28081.
 
References
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[2]Dixit, A. and Lambertini, L. (2003) Interactions of Commitment and Discretion in Monetary and Fiscal Policies. The American Economic Review, 93, 1522-1542.
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[3]Beetsma, R. and Jensen, H. (2003) Contingent Deficit Sanctions and Moral Hazard with a Stability Pact. Journal of International Economics, 61, 187-208.
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