Abstract
I utilize a differentiable dynamical system a 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.
Highlights
This paper studies the theoretical implications of monetary and fiscal interaction in a monetary union
I utilize an approach from applied mathematics in order to model the economic interactions in a supranational monetary union
It is not surprising that there are relatively few economic models that capture the sophisticated subspace of monetary-fiscal interaction
Summary
This paper studies the theoretical implications of monetary and fiscal interaction in a monetary union. This is an urgent and interesting topic, especially since the European sovereign debt crisis in 2010. I utilize an approach from applied mathematics in order to model the economic interactions in a supranational monetary union. It is not surprising that there are relatively few economic models that capture the sophisticated subspace of monetary-fiscal interaction. This has to do with the complexity and dynamics in this field of economics. These models lack of dynamics and fail to incorporate the complexity of monetary-fiscal interaction.
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