Fiscal Reform and Monetary Union in West Africa



however, would be different due to the fact that with euroization there would be no
seigniorage gains. Fiscal policy would hence be

xiE


λbF - c 2 (y* - yi )
λb2 + c2


(21)


How would these two cases compare with a full monetary union? First, I compare the
unilateral peg with monetary union and monetary autonomy, before I do the same for a
country that adopts a foreign currency.

Result 2:

Compared with monetary union, fixed exchange rate with an own currency implies that the
level of distortive taxation depends on the foreign monetary policy. If the anchor currency
inflates strongly, taxation under the one-sided peg is less distortionary than under full
monetary union. A sufficient condition for structural reforms to be higher under the one-
sided peg is dθB > bθG /n .

If the anchor currency inflates strongly, distortions will be lower under the peg than under
full monetary autonomy. Structural reforms will be higher under the peg if d is sufficiently
large.

Proof: See the Appendix.

In both cases will the distortion under a unilateral peg be lower than with full
monetary union and with monetary autonomy if the inflation imported from the anchor
currency is sufficiently high. In this case, seigniorage is high and therefore, there is less
need for taxation to cover expenditures. Under certain circumstances, irrespective of this
high seigniorage revenue the government will be induced to even increase structural

16



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