HWWA DISCUSSION PAPER 224

May 2003

FISCAL REFORM AND
MONETARY UNION
IN WEST AFRICA

ABSTRACT

The paper explores the interaction between the proposed monetary union for ECOWAS
and structural reforms of fiscal policy. The effects depend to a large extent on the
degree of similarity of member countries. In a monetary union of similar countries,
member states run a more distortive fiscal policy, while their structural reform efforts
will fall. This is also the case for countries that unilaterally peg to an anchor currency or
introduce a foreign currency. In an monetary union with dissimilar countries the reverse
can happen for those member states that are confronted with high distortion countries.
This result implies that current WAEMU members will run a less distortive fiscal policy
after the inclusion of other members of ECOWAS.

JEL-Classification: F 33, E 61, E 63.

Keywords: West Africa, monetary union, fiscal policy, structural reforms.

Carsten Hefeker

HWWA - Hamburg Institute of International Economics

Department World Economy

Neuer Jungfernstieg 21

D-20347 Hamburg

Germany

Phone: +49-40-42834-346

Fax: +49-40-42834-451

E-mail: [email protected]

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