The stability of monetary unions: Lessons from the breakup of Czechoslovakia

In 1993, Czechoslovakia experienced a two-step breakup. On January 1, the c ountry disintegrated as a political union, while preserving an economic and monetary union. Then, the Czech-Slovak monetary union collapsed on Februar y 8. This paper analyzes the economic background of the two breakups from t he perspective of the optimum currency area literature. The main finding is that the Czech and Slovak economies were vulnerable to asymmetric economic shocks, such as those induced by the economic transition. In particular, t he stability of Czechoslovakia was undermined by the low correlation of per manent output shocks, low labor mobility, and higher concentration of heavy and military industries in Slovakia. (C) 1999 Academic Press.