Fiscal Reform and Monetary Union in West Africa

which, with rational expectations, becomes

Given this changed central bank reaction function the government's budget constraint
is changed as well. Using this altered budget constraint in the objective function yields
structural reform efforts of

_sM = c^ω2 [Fi ^{+ b}(У* - ʃɔ]
ⁱ      λν₁ν₂ + c²ω₂

and leads to a fiscal policy of

_χM = Fi^λθB^ν2 - (У* - y_ι ^fλ^dlν2 ⁺ c^ω )
ⁱ              λν₁ν₂ + c²ω₂

A comparison of the results in (9) and (14) leads to

Result 1:

A monetary union among symmetric countries will lead to a more distortive fiscal policy in
all countries iff bθ^G> dθ^B. In this case, structural reform efforts will fall in the member
countries. The union wide rate of inflation will be higher than the rate of inflation before
unification while the output level falls.

Proof: See the Appendix.

Whether x_i^M > x_i^N and all further results depend upon whether bθ^G> dθ^B holds.
Unless the central bank's aversion against inflation is considerably larger than that of the
government, this inequality will be fulfilled. Since b is the contribution of tax policy to the

11

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