Fiscal Reform and Monetary Union in West Africa



At the same time, however, the high rate of inflation induced by the other countries
implies that country i participates with high seigniorage gains (particularly if d is high).
Therefore, the budget constraint is less tight and the government uses this favorable
situation to lower the opposed structural reforms.

Result 4:

If the average fiscal policy and output distortions of the other union members are
sufficiently smaller than the fiscal needs and the output distortions of country i, fiscal policy
will become more distortive than under a symmetric monetary union in country i. In this
situation, structural reform efforts will nevertheless increase if d
θB -bθG /n 0 .

Proof: See the Appendix.

The introduction of asymmetry among the member countries of the monetary union
implies that the change in the behavior is asymmetric as well. Those countries with lower
distortions in fiscal policy and a lower output gap than the average will be faced with
relatively more inflationary pressure than before. To counter this, they are induced to
implement even more reforms, which has positive effects on their output. If the condition
stated in the proposition is fulfilled, however, they will lower their structural reform efforts.
They can "afford" this since although their fiscal revenues have fallen, their seigniorage
revenue has increased. This, however, depends on seigniorage being a sufficiently large
contributor to the budget.

Those with more distortions than the average will instead use the fact that some
inflationary pressure is taken from them to run a more distortive fiscal policy, hence output
falls. This is the same result as in the symmetric monetary union. But since inflation is
reduced, they (if the condition in the proposition is fulfilled) will nevertheless have to
increase their structural reform efforts. A monetary union among asymmetric countries in

20



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