The Korean Journal of Economic Studies
How to Pursue Korean Monetary Union: A New Perspective Based on the Endogeneity of Optimal Currency Area Criteria
Jeong Eui Suh (Bank of Korea)Year 2023Vol. 71No. 3
AbstractThere are bound to be many uncertainties, but it will be difficult to completely deny the possibility that Korean reunification will take place as suddenly as in the case of German reunification. No matter when the reunification takes place, preparations for how to promote Korean monetary union should be fully prepared in advance so that economic turmoil can be minimized after the reunification. However, existing studies on Korean monetary union have not provided systematic alternatives in detail, such as how monetary policy should be operated in North Korea and how Korean monetary union should be pursued. For this purpose, this study examined the experiences of monetary union in Europe and Germany from the perspective of the endogeneity of optimal currency area criteria and sought a basic framework for establishing a specific action plan for Korean monetary union. As a result, based on the situation that the economy of North Korea region is temporarily separated and operated from that of South Korea region after reunification, it was analyzed that it would be necessary for the newly established central bank in North Korea region to implement monetary policy centered on interest rates from the beginning of reunification. Accordingly, it was found that it would be reasonable to allow the exchange rate between the two Korea regions’ currencies to be determined by the floating exchange rate system from the beginning. This is because boosting direct investment by South Korean companies in North Korea region and increasing trade between the two Korea regions are the most important in inducing the two Korea regions to meet the requirements of the endogeneity of optimal currency area criteria after reunification while minimizing the financial burden on the unified Korean government.