The West African Economic and Monetary Union (WAEMU) has integrated capital market and each member is subject to a common fiscal rule. I document significant heterogeneity in government revenue, spending, and debt across WAEMU countries. This paper offers a quantitative analysis of the fiscal rule in this economic and monetary union and characterizes an optimal reform. The theoretical framework is a model of fiscal policy where present-biased governments face shocks to their fiscal needs. The model features a trade-off between the flexibility for the government to respond to shocks and a commitment to limit the incentive to overborrow. I found that the current uniform 3% deficit limit rule improves the citizenry's welfare for all WAEMU countries compared to a counterfactual scenario with no fiscal rule. Country-specific fiscal rules allow for a Pareto improving reform over the current uniform rule. Each country's optimal deficit limit depends on the volatility of the shocks to its spending needs and the strength of the political economy frictions of the government. By restricting the fiscal rule to be uniform across members, the economic union forgoes 24% of the welfare gains that it could achieve with a country-specific fiscal rule.
We develop a method that can give insights to researchers to better specify their quantitative models in international business cycles studies. The guidance comes from the application of accounting procedure that is base on prototype model of international growth model including wedges that captures all the eventual frictions and distortions of markets. For each country, we include efficiency wedge, labor wedge, investment wedge, government wedge, preference wedge and foreign asset wedge. We then demonstrate the method by applying to US and Canada during the Great recession (2007-2008). We found that the economic downturns in both countries during this period is primary due to US investment wedge, US labor wedge, US efficiency wedge and secondary is due to Canada investment wedge. Those results suggest that the crisis has started in US and has propagated to Canada.
Delay and Bribe on Highways: the effect on regional trade integration in West Africa, with Marius Adom