INDEPENDENT FISCAL AGENCIES

Abstract.  There has been a considerable literature regarding the incentives of policymakers as a prime reason for persistent fiscal deficits and a variety of fiscal rules have been proposed as a remedy. However, the often inadequate flexibility of rules and the success of policy delegation in the monetary realm have motivated a small but growing number of studies that suggest delegating some aspects of fiscal policy to what will here be called 'independent fiscal agencies'. This paper surveys the related literature with a focus on three aspects: the motivation for the establishment of such agencies; their potential design; and the experience with these types of institutions.     

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, F33     

West African Currency Unions: Rationale and Sustainability

Drawing on the recent literature and experience of monetaryintegration in Europe, the paper examines the rationale forestablishing regional currency unions in western Africa. Despitedramatic economic, political and historical differences betweenthe two regions, the analysis indicates that monetary unificationmight well be beneficial for a number of the member states ofthe Economic Community of West African States (ECOWAS). Themain reason is that the costs stemming from the loss of monetaryautonomy are often more than offset by the gains originatingin the (partial) separation of monetary and fiscal powers. However,large countries with relatively ambitious public expenditureobjectives would not be attractive partners because they wouldbe expected to pressure the common central bank, creating excessiveinflation in the entire union. Hence, the desirability and sustainabilityof a currency union critically depends on fiscal disciplineamong its members. We also explore the vulnerability of regionalmonetary institutions to country-specific disturbances. Overall,the desirability of an ECOWAS monetary union requires a strongfiscal surveillance procedure both in the transition phase andafter the establishment of the union. (JEL E58, E61, F42)     

Modelling Monetary Union in Southern Africa: Welfare Evaluation for the CMA and SADC

This paper proposes a quantitative assessment of the welfare effects arising from the Common Monetary Area (CMA) and an array of broader groupings among Southern African Development Community (SADC) countries. Model simulations suggest that (i) participating in the CMA benefits all members; (ii) joining the CMA individually is beneficial for all SADC members except Angola, Mauritius and Tanzania; (iii) creating a symmetric CMA‐wide monetary union with a regional central bank carries some costs in terms of foregone anti‐inflationary credibility; and (iv) SADC‐wide symmetric monetary union continues to be beneficial for all except Mauritius, although the gains for existing CMA members are likely to be limited.     

Strengthening Post‐Crisis Fiscal Credibility: Fiscal Councils on the Rise – A New Dataset

Institutions that aim to constrain policy discretion in order to promote sound fiscal policies are once again at the forefront of the policy debate. Interest in fiscal councils – independent watchdogs active in the public debate – has grown rapidly in recent years. In this paper, we present the first cross‐country dataset summarising key characteristics of fiscal councils among International Monetary Fund members. The data document a surge in the number of fiscal councils since the 2008–09 economic and financial crisis, and also illustrate that well‐designed fiscal councils are associated with stronger fiscal performance and better macro‐economic and budgetary forecasts. Key features of effective fiscal councils include operational independence from politics, the provision or public assessment of budgetary forecasts, a strong presence in the public debate and the monitoring of compliance with fiscal policy rules.     

Fiscal Rules in a Monetary Union: A Short-Run Analysis

This article challenges the conventional result according to which an instrument-independent central bank able to strictly commit to price stability makes fiscal constraints unnecessary. We present a model of a monetary union with heterogeneous members where the inefficient policy mix resulting from the lack of coordination between the common monetary policy and national fiscal policies incites the governments to appoint excessively liberal delegates to the central bank's board. We characterize the fiscal restraints necessary to restore the central bank's ability to deliver the most desirable degree of price stability. It appears that even country-specific and state-contingent restraints may be counterproductive for some member states.