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Scotland: Currency Options and Public Debt

Published online by Cambridge University Press:  01 January 2020

Angus Armstrong  and
Monique Ebell
Angus Armstrong*
Affiliation:
National Institute of Economic and Social Research, Economic and Social Research Council and Centre for Macroeconomics
Monique Ebell*
Affiliation:
National Institute of Economic and Social Research and Centre for Macroeconomics
*
E-mail: a.armstrong@niesr.ac.uk
E-mail: m.ebell@niesr.ac.uk
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Abstract

This paper considers which currency option would be best for an independent Scotland. We examine three currency options: being part of a sterling currency zone, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important. Recent events around the world, particularly in Europe, show that it is essential to consider how an independent Scotland would seek to adjust to adverse economic circumstances. In economists' terms, it is important to think through the ‘off-equilibrium’ adjustment paths of each of the currency options. The amount of public debt, and so the capacity for a fiscal response, is a critical determinant of these paths and therefore of the optimal currency choice. Since commitment to a currency union by an independent country can only be conditional, an independent Scotland might find it optimal to abandon the currency union in the future if the financial stability advantages to having its own currency begin to outweigh any disadvantages due to trade and transactions costs.

Keywords

currency unionmonetary unionoptimal currency areadebt sustainabilityspeculative attacksE52E58F31F33F36H60H63R113
Type
Research Articles
Information
National Institute Economic Review , Volume 227 , February 2014 , pp. R14 - R20
Copyright
Copyright © 2014 National Institute of Economic and Social Research

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