sooner or later develop which might could have a negative spillover on the monetary policy.
A simple reduction of deficits or government spending is not enough to ensure sustainable
government finance (Easterly 1999). In addition, there is the problem of creative accounting
that allows to officially meet fiscal targets by pushing certain items off budget (Milesi-
Feretti 2000). Thus, apart from institutional arrangements that separate monetary and fiscal
policies structural reforms would be needed to ensure a smooth working of a larger
monetary union in West Africa.
So far, theoretical discussions about the interaction between fiscal policy and
monetary union have derived inconclusive predictions about potential spillovers from fiscal
policy to monetary policy. Part of the literature cautions that a distortive monetary policy
might force the central bank into a more expansive monetary policy. This can only be
avoided if fiscal policy is coordinated among member states (Beetsma and Uhlig 1999),
requiring not only entry conditions but rules for the working of fiscal policy in the monetary
union.4 Others instead argue that fiscal competition might actually put the central bank into
a better position vis-à-vis the member states' governments, reducing pressure on the
monetary authority and thus potentially keeping inflation low. A coordinated fiscal policy
instead would shift bargaining power to governments (Beetsma and Bovenberg 1998a).5
Fatas and Rose (2001) consider the relation between monetary regimes and fiscal policy
from an empirical point of view and find that unilateral currency pegs usually imply a less
restrictive fiscal policy than full monetary unions or a currency board.
While this literature is mostly concerned with the monetary and fiscal policy mix,
only few papers deal with monetary integration and structural policies which is the focus of
4 There are several possibilities discussed why expansive monetary policy could lead
to higher inflation. Either the central bank might be forced to directly monetized budget
deficits or increase money supply to negative interest effects from higher budget deficits.
5 Dixit and Lambertini (2000) present yet another view and argue that a first best
solution can be achieved, despite that fact that fiscal policy will push inflation higher, and
that this is independent of who of the two players has the first move.