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Stability of Monetary Unions: Lessons from the Break-up of Czechoslovakia

CentER Discussion Paper No. 9874

41 Pages Posted: 24 Mar 1999  

Jan Fidrmuc

Brunel University - Department of Economics and Finance; Centre for Economic Policy Research (CEPR); University of Michigan at Ann Arbor - The William Davidson Institute

Julius Horvath

Central European University (CEU) - Department of Economics

Jarko Fidrmuc

Zeppelin University Friedrichshafen; Charles University in Prague

Date Written: July 1998

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.

JEL Classification: F33, F36, F42

Suggested Citation

Fidrmuc, Jan and Horvath, Julius and Fidrmuc, Jarko, Stability of Monetary Unions: Lessons from the Break-up of Czechoslovakia (July 1998). CentER Discussion Paper No. 9874. Available at SSRN: https://ssrn.com/abstract=146233 or http://dx.doi.org/10.2139/ssrn.146233

Jan Fidrmuc (Contact Author)

Brunel University - Department of Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom
+44 1895 266 528 (Phone)
+44 1895 269 770 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

University of Michigan at Ann Arbor - The William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Julius Horvath

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
36-1-327-3248 (Phone)
36-1-327-3243 (Fax)

Jarko Fidrmuc

Zeppelin University Friedrichshafen ( email )

Am Seemooser Horn 20
Friedrichshafen, 88045
Germany

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

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