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

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, F33Union mone´taire en Afrique de l'Ouest : qui pourrait gagner, qui pourrait perdre, et pourquoi? Les auteurs de´veloppent un mode`le dans lequel les besoins financiers des gouvernements de´passent le niveau socialement optimal parce que des ressources publiques sont de´tourne´es de manie`re a`servir les inte´reˆts e´troits du groupe au pouvoir. Dans une perspective de bien-eˆtre social, cela entraıˆne des pressions indues sur la banque centrale pour qu'elle extraie du seigneuriage. La politique mone´taire souffre Without implication, we would like to thank Ousmane Dore´, Dominique Guillaume, Benoıˆt Anne, Charalambos Tsangarides, and the participants at the conference on the 'Feasibility of Monetary Unions in African Regional Economic Communities,' organized by the UN Economic Commission for Africa (Accra, Ghana, 8-10 October 2002) for useful comments and discussions and Heather Milkiewicz for research assistance. We are also grateful to two anonymous referees for detailed comments that led to substantial improvements in the paper. The views expressed in this article do not commit any official institution.

Fiscal reform and monetary union in West Africa

“…This can be thought to reflect a group of countries such as the present WAEMU members which are relatively similar in comparison to the differences that are displayed by the larger group of ECOWAS members (Debrun et al 2002).…”

“…It has in particular been pointed out that monetary union in West Africa is problematic because mechanisms that ensure a prudent fiscal policy are absent. There are several countries that have large fiscal deficits of up to more than 10 percent of GDP (Masson and Patillo 2001 b), reflecting distortions that lead to excessive deficits because rulers have an interest to benefit certain groups in the economy (Debrun et al 2002). As Guillaume and Stasavage (2000) argue, African countries lack the institutions that ensure financial and fiscal stability.…”

Modeling Fiscal-Monetary Policy Interaction in Nigeria

“…This distortion is assumed to be equal with the seigniorage or money borrowed from the central bank in financing fiscal deficit as contained in equation 1 (see Debrun, et al 2005).…”

What is Fuzzy About Clustering in West Africa?

“…5 In general, correlations of terms of trade shocks are higher among the WAEMU member countries than between WAEMU and WAMZ countries, or among the WAMZ countries themselves. 4 See Cashin and Pattillo (2000) and Masson and Pattillo (2005). 5 See Masson and Pattillo (2001).…”

“…They therefore suggest that monetary unification among subsets of countries is preferable to wider monetary integration in West Africa. Debrun, Masson and Pattillo (2005) develop a model of monetary and fiscal policy interactions and use it to assess the potential for monetary integration in ECOWAS. Their findings show that the proposed monetary union is desirable for most non-WAEMU countries but not for most of the existing WAEMU member states unless Nigeria implements institutional changes that lower its financing needs.…”