terms of fiscal policy and output gaps will thus magnify the differences between these
countries.
6. Conclusion
The present paper has aimed to establish the connection between fiscal policy and structural
reform efforts by a government in a monetary union or with a unilateral peg. It could be
shown that a symmetric monetary union, in the sense of relatively similar economic
structures in the participating countries, leads governments to adopt a more distortive fiscal
policy while their reform efforts are reduced. This is because governments do no longer
fully internalize the negative inflationary implications of such a fiscal policy. In such a
situation one can obviously make a case for some kind of fiscal cooperation to accompany
the introduction of monetary union. This is no longer necessarily the case if a monetary
union is formed among asymmetric countries. A monetary union including diverse
countries will induce those that are below average in terms of financing needs and
distortions to adopt a more restrictive fiscal policy. This is because they realize that the
average inflationary pressure on the central bank has increased. To compensate for this, and
to keep the rate of inflation down, they themselves work to reduce these pressures by
pursuing a less distortive fiscal policy. However, structural reforms will still be lower in
these countries than before the monetary union. Thus, the composition of the monetary
union has a strong influence on changes of the policy mix brought about by the introduction
of a common money. It also implies that a fiscal cooperation is no longer necessarily useful
in terms of avoiding that fiscal policy becomes too distortive. An asymmetric monetary
union may be more effective in achieving this, at least for some countries, than cooperation.
A unilateral peg with fixed exchange rates or with euroization will imply as well that the
pegging country has a lower incentive to correct fiscal distortions because there will be no
inflationary response. However, such a unilateral peg can still yield even for these countries
a better policy mix than a full monetary union. This might rationalize why some countries
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