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An Independent Scotland’s Currency Options Redux: Assessing the Costs and Benefits of Currency Choice

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  • Ronald MacDonald

Abstract

This paper demonstrates that all of the currency options available to an independent Scotland come with the price tag of an austerity programme to the tune of £40bn. This is due to the need to accumulate foreign exchange reserves. So called Plan A – being part of a formal monetary union – comes with the added price tag of a 7% loss of competitiveness on average per annum. There will also be considerable volatility of competitiveness, similar to a separate currency. A formal sterling currency will end with a speculative attack and currency crisis which would costs Scotland alone anything in the region of £30bn to £200bn. The only currency option that maximizes the benefits and minimizes the costs of independence is that of a separate currency. All of the other options have none of the benefits but even greater costs than the separate currency option. However, this would also be a costly option in terms of the costs of redenomination and the need to build up an adequate stock of foreign exchange reserves.

Suggested Citation

  • Ronald MacDonald, 2014. "An Independent Scotland’s Currency Options Redux: Assessing the Costs and Benefits of Currency Choice," CESifo Working Paper Series 4952, CESifo.
  • Handle: RePEc:ces:ceswps:_4952
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    References listed on IDEAS

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    1. Ronald MacDonald, "undated". "Currency issues and options for an independent Scotland," Working Papers 2013_12, Business School - Economics, University of Glasgow.
    2. Angus Armstrong & Monique Ebell, 2013. "Scotland’s Currency Options," Discussion Papers 1302, Centre for Macroeconomics (CFM).
    3. Armstrong, Angus & Ebell, Monique, 2014. "Scotland: Currency Options and Public Debt," National Institute Economic Review, National Institute of Economic and Social Research, vol. 227, pages 14-20, February.
    4. Buiter, Willem H., 2000. "Optimal currency areas: why does the exchange rate regime matter? (with an application to UK membership in EMU)," LSE Research Online Documents on Economics 20178, London School of Economics and Political Science, LSE Library.
    5. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    6. Bordo,Michael D. & MacDonald,Ronald (ed.), 2012. "Credibility and the International Monetary Regime," Cambridge Books, Cambridge University Press, number 9780521811330, October.
    7. Michael D. Bordo & Lars Jonung, 1999. "The Future of EMU: What Does the History of Monetary Unions Tell Us?," NBER Working Papers 7365, National Bureau of Economic Research, Inc.
    8. Buiter, Willem, 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers.
    9. Mr. Fabian Valencia & Mr. Luc Laeven, 2012. "Systemic Banking Crises Database: An Update," IMF Working Papers 2012/163, International Monetary Fund.
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    More about this item

    Keywords

    Currency Regimes; Economics of Scottish independence;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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