Asymmetries in the Behaviour of Members of a Monetary Union: A Game-Theoretic Model with an Application to West Africa

Using a game-theoretic model, this paper explores the positive and normative economics of government policy choices in a monetary union. If individual governments have control over fiscal policy, then the non-cooperative solution to the model is not Pareto optimal. Moreover, the distribution of welfare typically favours largest members of the union. These results are compared with the experience of the West African Monetary Union, which exhibits many of the stylised facts predicted by the model.