basically a function of its relative preferences for avoiding reform and for having a high
output level. Quite generally, changes in the level of distortions that affect the output have
to be traded off against structural reforms. This will always be the case, irrespective of the
particular exchange rate chosen, as the following section demonstrates.
4. The Effects of a Unilateral Peg
An alternative to joining a monetary union is a unilateral peg. Irrespective of the particular
arrangement, its main characteristic is that the anchor currency does not react to
developments in the country that has adopted its currency or pegged to it. Since it is not
clear what arrangement will be chosen between the WAEMU members and the other
ECOWAS members, it is conceivable that the ECOWAS countries just peg unilaterally to
the policy of the BCAEO, at least in the transition period.9 Alternatively, it is also possible
that the larger monetary union pegs to the euro and mimicks the policy of the European
Central Bank (see Honohan and Lane 2000; Fouda and Stasavage 2000).10 This would at
least solve any possible credibility problems for the new monetary union, and it would have
that advantage that no new institutions would have to be build. Such one-sided pegs (or
adoption of a foreign currency), however, will also have negative implications for the fiscal
policy of the pegging countries, as this section will demonstrate.
Let the monetary policy of the country to which country i pegs be given as
π = (y*- y) )+xj (18)
j θB
9 The Banque Central des Etats de l’ Afrique de l’ Ouest is the long-standing central
bank of WAEMU. For details, see Masson and Patillo (2001a).
10 It is however unlikely that the euro-area and the ECB would assume responsibilities
for the monetary union in Africa such as France did for the CFA zone.
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