The purpose of this research is to identify an exchange rate regime that would be suitable for North Korea to achieve its goal of economic reform. To do so, we will examine implications of the optimum currency area, a theoretical groundwork for the implementation of the euro, a single common currency for European Union countries and for transitional economies, including North Korea. We also evaluate the experiences and efficacy of each of four transitional economies (three self-engineered economic reform countries [China, Vietnam, and Cuba] and one forced economic reform country [Russia]), including exchange rate arrangements based on stylized facts.

Furthermore, we also discuss the implication of North Korea’s exchange rate arrangement for South Korea. Not many policy papers address exchange rate regimes of emerging transitional economies such as North Korea. This paper will present the pros and cons of alternative exchange rate arrangements for North Korea. The choice may have a significant impact on bilateral relations between the two Koreas in politics as well as in economics.

The sudden collapse of the emerging yet destitute transitional economy of North Korea is not desirable for surrounding countries such as South Korea, China, Russia, Japan, and the United States (members of the six-party talks). The success of economic reform for North Korea would be an effective way to make sure that it will join the world community as a peace-loving member and not as a threat to South Korea, the United States, Japan, and the rest of the world.