Fiscal Reform and Monetary Union in West Africa



as the difference between actual and desired output increases. The higher this gap is, the
more incentive the government has not to increase it further by pushing fiscal deficits
higher. Hence, xi will be lowered which, ceteris paribus, will require that si increases (given
the budget constraint). There is hence a positive relation between structural reforms and the
output distortions in economy i (equation 8). However, fiscal revenue increases if there is a
large financial need and therefore (9) is increasing in Fi but falling in
(y* - yi ).

3. Monetary Union Among Symmetric Countries

3.1. Government Policy

Having derived the national case, I now turn to monetary union and begin with the case of
symmetric countries, which is thought of as capturing a monetary union among similar
countries. This can be thought to reflect a group of countries such as the present WAEMU
members which are relatively similar in comparison to the differences that are displayed by
the larger group of ECOWAS members (Debrun et al. 2002).

While the governments’ objective functions do not change, the utility function of the
central bank becomes

LCCB = 1

2


θCCB 2 +1n=t(y,- y* )2
n    i
=1


(10)


where n is the number of participants to the monetary union. As argued above, it is
henceforth assumed that
θB = θCCB .

Given these preferences, the ECB's reaction function is

∏ + ɪ n=1[(y*

(11)


1 B

10



More intriguing information

1. Herman Melville and the Problem of Evil
2. TOWARDS THE ZERO ACCIDENT GOAL: ASSISTING THE FIRST OFFICER MONITOR AND CHALLENGE CAPTAIN ERRORS
3. Life is an Adventure! An agent-based reconciliation of narrative and scientific worldviews
4. Kharaj and land proprietary right in the sixteenth century: An example of law and economics
5. Campanile Orchestra
6. KNOWLEDGE EVOLUTION
7. The name is absent
8. Dementia Care Mapping and Patient-Centred Care in Australian residential homes: An economic evaluation of the CARE Study, CHERE Working Paper 2008/4
9. AJAE Appendix: Willingness to Pay Versus Expected Consumption Value in Vickrey Auctions for New Experience Goods
10. For Whom is MAI? A theoretical Perspective on Multilateral Agreements on Investments