countries to the euro can have negative effects on structural fiscal deficits. In all three cases,
there is an increase in fiscal distortions, whereas the change in structural reforms is
ambiguous. Allowing for asymmetries in terms of fiscal needs and output distortions, the
negative result is no longer universal. Some countries will instead switch to a less distortive
fiscal policy when paired with countries featuring large fiscal needs. Under certain
circumstances, detailed below, it is possible that monetary union will actually increase
reform efforts in some countries. In light of the different fiscal position of the countries
involved, this would be the present WAEMU members.

The remainder of the paper is structured as follows. Section 2 derives the benchmark
case of monetary autonomy, while section 3 looks at a symmetric monetary union. Section
4 discusses an unilateral peg by an outside country. Section 5 discusses the case of a full
monetary union among asymmetric countries. Section 6 concludes by applying the
theoretical results to the case of the planned West African monetary union.

2. The Model

2.1. The Basic Structure

Output in country i is given as

Yi = Yi ^+πi^-πe ^-xi                                          (1)

where x_i denotes a fiscal package that could either have negative supply effects because of
the negative effects of taxation, or a positive influence on output if xi denotes subsidies.
Output is increasing in monetarY surprises π_i- π_i^e , where I assume that the central bank has
full control over the rate of inflation and that the expected rate of inflation is formed
rationallY.

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