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)| false “ Zettelmeyer, Jerominand Daniel A. Citrin, Stabilization: Fixed Versus Flexible Exchange Rates”, in ( Daniel A. Citrinand Ashok K. Lahiri eds), Policy Experiences and Issues in the Baltics, Russia, and Other Countries of the Former Soviet Union,IMF Occasional Paper No. 133, pp. 93- 102, December 1995.
This research was done at the request of the Korea Development Institute. The author wishes to thank Vivek Arora, Woo-sik Chu, Hong-tack Chun, James P. Gordon, Kenneth H. Kang, Yeong Rin Kim, Russell Kincaid, Jae-woo Lee, Il-houng Lee, Jorge Márquez-Ruarte, Wolfgang Merz, John Odling-Smee, Jin Park, Günther Taube, John Wakeman-Linn, Jeromin Zettelmeyer, and especially Peter M. Keller for helpful discussions and comments. The views expressed are those of the author and not necessarily those of the commentators or the International Monetary Fund.
In this paper, the Republic of Korea is referred to as South Korea and Democratic Peoples Republic of Korea as North Korea for the sake of simplicity.
For detailed discussions on these classic shock-absorption mechanisms, see studies on an optimal currency area including Mundell (1961), Flemming (1971), Boughton (1991), Krugman (1992), and Masson and Taylor (1993).
The importance of fiscal transfers within a common currency area in absorbing regional shocks has been recognized by many studies, including Sachs and Sala-i-Martin (1992) on the United States.
For example, according to Lee (1993), black market prices for selected goods diverged by a factor of five from official prices, and one noncash unit of money was over ten times cheaper than one cash unit in 1984. In comparison, noncash reportedly traded for cash at a rate of some 20 to 1 in Tajikistan in late 1994 due to expansionary credit policies and limited cash supply (IMF 1996 (a)).
See, for example, Clark et al (1994) for the definition of equilibrium exchange rates and the discussion of various estimation methods.
See Halpern and Wyplosz (1996) for reasons for difficulties in estimating equilibrium exchange rates in transition economies.
This downward price rigidity is common in market economies but appears to be more pronounced in transition economies. See, for example, Coorey, Mecagni, and Offerdal (1996) and Pujol and Griffiths (1996).
Other countries or groups of countries in currency union include Franc-zone countries in Africa (the CFA Franc); eastern Caribbean countries (the East Caribbean dollar); Ethiopia and Eritrea (the Ethiopian birr); Belgium and Luxembourg (the Belgium franc); and Puerto Rico and the Marshall Islands (the U.S. dollar). China after the political reintegration of Hong Kong in 1997 will be a case of a regional monetary arrangement involving the use of separate currencies.
Unofficial data from Oxford Analytica Daily Brief, February 13, 1996.
Other arguments were: (i) equity and solidarity would require rapid attainment of parity; (ii) it was the collapse of Eastern European markets, not high wages, that had caused a decline in labor demand; and (iii) given the widespread expectation of massive job losses through enterprise restructuring in the East, workers would anyway push for higher wages to ensure larger unemployment benefits. See FitzRoy and Funke (1995) for more details.
Two other major findings of the survey were: (i) the great majority of people were reluctant to migrate and did not anticipate doing so; and (ii) the minority of people who considered migration very likely was large enough to create further migration comparable to what had occurred since September 1989.
First, their average rate of CPI inflation during the 12 months preceding the initiation of monetary union can be no more than 1.5 percentage points higher than the inflation rates of the three EC member states with the lowest inflation. Second, countries would need to maintain stable exchange rates (within their normal EMS fluctuation bands) for the two years preceding entry. Third, long-term interest rates during the year preceding entry must be no more than 2 percentage points higher than those of the three member-states that best controlled inflation. Finally, the budget deficit could be no more than 3 percent of GDP, and the gross public debt should be at or below 60 percent of GDP or, if not, the debt to GDP ratio should be sufficiently diminishing and approaching the 60 percent reference value at a satisfactory pace.
They were Armenia, Belarus, Kazakstan, the Russian Federation, Tajikistan, Turkmenistan and Uzbekistan.
Costs of Korean unification usually refer to short-term costs to the South arising from unification. More accurately, they should be the short-term net income losses of a unified Korea due to unification. This paper uses these two definitions interchangeably since the unification expenses of the South are not likely to be offset by gains in the North in the short term.
The relationship for Korea can be expressed as C = PN/S * (X - IN/S)/(1+PN/S*X), where C is the total compensations in percent of South Korean GDP; Pn/s is North Korean population relative to the South; X is the per capita income of the North relative to the South after income compensation; and In/s is the current per capita income of the North relative to the South.
The actual outcomes in Germany (i.e., per capita income of the East reaching roughly half the western level soon after unification with annual transfers of about 5 percent of western GDP) were similar to this rough projection although some public expenditures were not directly used for income support.
See Halpern and Wyplosz (1996) for stylized facts on real exchange movements in transition economies.
This section does not cover several equally important policy areas such as financial sector reform, fiscal reform, and privatization since policies in these areas are not significantly affected by the choice of monetary arrangements between the two regions.