Monetary Union in West Africa: Who Might Gain, Who Might Lose, and Why?

28 Pages Posted: 1 Apr 2005

See all articles by Xavier Debrun

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Paul R. Masson

International Monetary Fund (IMF) - Research Department; The Brookings Institution

Catherine A. Pattillo

International Monetary Fund (IMF) - Research Division

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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

Suggested Citation

Debrun, Xavier and Masson, Paul R. and Pattillo, Catherine, Monetary Union in West Africa: Who Might Gain, Who Might Lose, and Why?. Available at SSRN: https://ssrn.com/abstract=696954

Xavier Debrun (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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Washington, DC 20431
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Paul R. Masson

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

The Brookings Institution ( email )

1775 Massachusetts Ave. NW
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United States
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202-797-2968 (Fax)

Catherine Pattillo

International Monetary Fund (IMF) - Research Division ( email )

700 19th Street NW
Washington, DC 20431
United States

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