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

  • Fidrmuc, Jan

    (Center for European Integration Studies, University of Bonn)

  • Horvath, Julius

    (Central European University, Budapest)

  • Fidrmuc, Jarko

    (Abteilung Transformationsoekonomie, Institut fuer Hoehere Studien)

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 the 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 a higher concentration of heavy and military industries in Slovakia, made the 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.

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Paper provided by Institute for Advanced Studies in its series Transition Economics Series with number 10.

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Length: 34 pages
Date of creation: Jul 1999
Date of revision:
Handle: RePEc:ihs:ihstep:10
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