Fiscal Reform and Monetary Union in West Africa

3.2. Government Utility

Having established how the optimal policies change through the introduction of
monetary union obviously raises the question of how the governments’ utilities change.
This is mainly a function of the output effects that changes in fiscal policy have and the
aversion of governments to structural reform.

Losses under national monetary policy are given as

-x^N]² +θ^G

+ λs^N

where N refers to the case of national autonomy and x^N and s^N are the values expressed in
(8) and (9) respectively. The loss under monetary union (M) follows from (13) and (14) as

Comparing the losses under the two regimes, government i will decide to enter the
(symmetric) monetary union if L^G_i (N)> L^G_i (M). This is equivalent to

A high aversion to structural reforms (measured as λ) makes the monetary union
attractive because these fall under monetary union. Therefore, they enter on the left hand
side. The RHS of the inequality measures the negative effects of a higher distortionary
taxation. Since x^M > x^N there will be an output loss associated with the entry into monetary
union. Whether government i gains or loses from entering the monetary union is thus

13

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