this paper. Calmfors (2001) and Sibert and Sutherland (2000) have asked how the
introduction of a common currency might change the incentives of government to
implement labor market reforms, while Ozkan et al. (1997) and Beetsma and Jensen (1999)
analyze the incentives a country has to implement structural reforms if it aims to join a
monetary union. Obviously, a country has higher incentives to implement reforms if these
are necessary for being admitted to the union. Once inside the union, this incentive is
reduced and it might even happen that reforms are rolled back.
This paper combines the two issues. I ask how a monetary union influences
governments' incentives to implement structural reforms in their fiscal systems and how the
policy mix is affected. This is analyzed for a group of symmetric countries first which can
be taken to reflect a monetary union among similar countries which provides the benchmark
for the later results. The second setup turns to monetary cooperation and union among
heterogeneous countries with different fiscal needs and output gaps. This is particularly
relevant for the envisaged enlargement of WAEMU to include countries beyond the current
union, as the fiscal situation is much worse for the non-WAEMU members. I consider the
case of a unilateral peg of an outside country to a monetary union, either in the case of a
simple pegged exchange rate or, alternatively, with the introduction of that union's currency.
This should reflect possible intermediate regimes or a monetary union where the joining
countries does not have voting power in the common central bank. This can also provide
lessons for the desirability of different institutional setups of a larger monetary union and
the transition towards it as they are currently discussed (see Masson and Patillo 2001a).
The basic results are that it makes a significant difference what type of a monetary
union is considered. In particular, a symmetric monetary union will always lead to more
fiscal distortions and less structural reforms because any single countries perceives that its
trade-off between reforms and inflation has improved. These results can be even
strengthened if there is a unilateral peg or the introduction of a foreign currency (be it the
euro or the adoption of some existing currency). In particular, a unilateral peg of the