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

Bodo Herzog

ESB Business School, Reutlingen University, Reutlingen, Germany.

DOI: 10.4236/jamp.2014.28081                

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.

Keywords

Differential Equations, Monetary-Fiscal Interaction, Monetary Union Theory

Conflicts of Interest

The authors declare no conflicts of interest.

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