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

Author

Listed:
  • Xavier Debrun
  • Paul Masson
  • Catherine Pattillo
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 classification: E58, E61, E62, F33 Union monétaire en Afrique de l’Ouest : qui pourrait gagner, qui pourrait perdre, et pourquoi? Les auteurs développent un modèle dans lequel les besoins financiers des gouvernements dépassent le niveau socialement optimal parce que des ressources publiques sont détournées de manière à servir les intérêts étroits du groupe au pouvoir. Dans une perspective de bien‐être social, cela entraîne des pressions indues sur la banque centrale pour qu’elle extraie du seigneuriage. La politique monétaire souffre aussi à cause d’un biais vers l’expansion monétaire du à l’incapacité des autorités à s’engager à maintenir la stabilité des prix. Une telle conjecture sur le pattern des politiques fiscale et monétaire paraît pertinente en Afrique, et cela a des profondes implications sur les incitations de pays fiscalement hétérogènes à former une union monétaire. On calibre le modèle pour l’ajuster aux données de l’Afrique de l’Ouest et on l’utilise pour évaluer les unions monétaires de l’ECOWAS. L’hétérogénéité fiscale apparaît critique dans la définition de zones monétaires mutuellement bénéfiques pour tous les membres. En particulier, la participation du Nigeria dans les configurations qui sont envisagées pour le moment ne serait pas dans l’intérêt des autres pays de l’ECOWAS, à moins que celles‐ci s’accompagnent d’une restriction effective des besoins financiers du Nigeria.

Suggested Citation

  • Xavier Debrun & Paul Masson & Catherine Pattillo, 2005. "Monetary union in West Africa: who might gain, who might lose, and why?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(2), pages 454-481, May.
    • Handle: RePEc:wly:canjec:v:38:y:2005:i:2:p:454-481
    DOI: 10.1111/j.0008-4085.2005.00288.x
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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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