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Monetary union in West Africa: who might gain, who might lose, and why?

Xavier Debrun (), Paul Masson () and Catherine Pattillo

Canadian Journal of Economics, 2005, vol. 38, issue 2, 454-481

Abstract: We develop a model in which governments' financing needs exceed the socially optimal level because public resources are diverted to serve the narrow interests of the group in power. From a social welfare perspective, this results in undue pressure on the central bank to extract seigniorage. Monetary policy also suffers from an expansive bias, owing to the authorities' inability to precommit to price stability. Such a conjecture about the fiscal-monetary policy mix appears quite relevant in Africa, with deep implications for the incentives of fiscally heterogeneous countries to form a currency union. We calibrate the model to data for West Africa and use it to assess proposed ECOWAS monetary unions. Fiscal heterogeneity indeed appears critical in shaping regional currency blocs that would be mutually beneficial for all their members. In particular, Nigeria's membership in the configurations currently envisaged would not be in the interests of other ECOWAS countries unless it were accompanied by effective containment on Nigeria's financing needs.

JEL-codes: E58 E61 E62 F33 (search for similar items in EconPapers)
Date: 2005
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Working Paper: Monetary Union in West Africa; Who Might Gain, Who Might Lose, and Why? (2002) Downloads
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