The Currency Conundrum for an Independent Scotland

Main points

• Scotland’s fiscal and current account deficits are inconsistent with the SNP’s currency proposal of the informal use of sterling post independence.
• International capital markets will be the ultimate arbitor of currency choice for an independent Scotland.
• The paper considers the appropriateness of fixed versus floating exchange rates and concludes that a floating rate regime is the optimal choice in the transition to independence.
• If Scotland’s current account deficit remains at its current level post-independence, a new Scottish currency would incur a large devaluation.

This paper we revisit the issue of currency regime choice for an independent Scotland using an international macroeconomic/finance framework. Specifically, we consider the main competing proposals for currency choice with an emphasis on the the SNP’s official policy of the informal use of sterling post independence. We conclude that from a macroeconomic perspective this option is unlikely to be credible to international capital markets. The option that would be credible, and avoids the austerity associated with the choice of a fixed exchange rate option, would be a free float at least during the transition period of independence.

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