Scotland as an Optimal Currency Area.

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Abstract

Since the Scottish independence movement has reached the point that there will be a referendum on Scottish independence this September, the issue of whether the Scotland is optimal currency areas is very topical.In this paper we review the microeconomic foundations of an optimal currency area. We test these microeconomic foundations. We find that the UK, Scotland and the UK without Scotland meet the microeconomic criteria for a common currency area. While adopting a common currency is ultimately a political decision, these results imply that the broadest of these areas, the UK, is the optimal currency area in the sense of minimizing transactions costs.We do find differences in the UK less Scotland and Scotland economies in loan data. We further find that neither the euro bloc nor the euro bloc including Scotland meet the microeconomic criteria for a common currency area. In the event of a “yes” vote for Scottish independence, the immediate problem facing the Scottish government is to decide on an exchange rate regime that is seen as credible by the financial markets to avoid a flight of capital. How policymakers chooses between alternative exchange rate regimes is currently a topic for hot debate in central banking circles and the process of a monetary union breaking up is a fascinating area worthy of future research.

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• Scotland as an Optimal Currency Area. (deposited 10 Jul 2014 10:12)
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