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Stability of Monetary Unions: Lessons from the Break-up of CzechoslovakiaJan FidrmucBrunel University - Department of Economics and Finance; Centre for Economic Policy Research (CEPR); University of Michigan at Ann Arbor - The William Davidson Institute Julius HorvathCentral European University (CEU) - Department of Economics Jarko FidrmucUniversity of Munich; Comenius University - Department of Economic and Financial Models; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) July 1998 CentER Discussion Paper No. 9874 Abstract: In 1993, Czechoslovakia experienced a two-fold break-up: On January 1, the country disintegrated as a political union, while preserving an economic and monetary union. Then, the Czech-Slovak monetary union collapsed on February 8. We analyze the economic background of the two break-ups, and discuss lessons for stability of monetary unions in general. We argue that Czechoslovakia fulfilled some of the optimum currency area criteria; however, given the low correlation of permanent shocks, it appears it was relatively less integrated than some other existing unions. That, along with low labor mobility and higher concentration of heavy and military industries in Slovakia, made Czechoslovak economy vulnerable to asymmetric economic shocks-such as those induced by the economic transition. Furthermore, the Czech-Slovak monetary union was marred by low credibility, lack of political commitment, low exit costs, and the absence of fiscal transfers.
Number of Pages in PDF File: 41 JEL Classification: F33, F36, F42 working papers seriesDate posted: March 24, 1999Suggested CitationContact Information
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