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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
  • Research Fellow CESifo Policy Group Munich

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.
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Suggested Citation

  • Ronald MacDonald & Research Fellow CESifo Policy Group Munich, "undated". "An independent Scotland’s currency options redux: Assessing the costs and benefits of currency choice," Working Papers 2014_11, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2014_11
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    References listed on IDEAS

    as
    1. 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.
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    3. Ronald MacDonald, "undated". "Currency issues and options for an independent Scotland," Working Papers 2013_12, Business School - Economics, University of Glasgow.
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    5. Angus Armstrong & Monique Ebell, 2013. "Scotland’s Currency Options," Discussion Papers 1302, Centre for Macroeconomics (CFM).
    6. 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.
    7. Bordo,Michael D. & MacDonald,Ronald (ed.), 2012. "Credibility and the International Monetary Regime," Cambridge Books, Cambridge University Press, number 9780521811330, October.
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    More about this item

    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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