Stability of Monetary Unions: Lessons from the Break-up of Czechoslovakia
Brunel University - Department of Economics and Finance; Centre for Economic Policy Research (CEPR); University of Michigan at Ann Arbor - The William Davidson Institute
Central European University (CEU) - Department of Economics
Zeppelin University Friedrichshafen; Charles University in Prague
CentER Discussion Paper No. 9874
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
Date posted: March 24, 1999
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