Professor Ronald MacDonald, the Adam Smith professor of political economy at the University of Glasgow, argues that an independent Scotland would need its own currency as it would be a net exporter of oil whilst the rUK (the rest of the UK) would be a net importer.
That, he says, means Scotland would be more at risk from the volatility of oil prices, meaning the sterling zone plans proposed by the SNP government cannot be a long-term solution.
Writing today for Scotsman.com, Prof MacDonald, who has been a consultant to the International Monetary Fund on 14 separate occasions on exchange rate related issues, writes: “If Scotland were to become an independent nation it would be a net exporter of hydrocarbons whereas its near neighbour, rUK, would remain a net importer of oil. Hence if there are shocks to the price of oil, which there are bound to be, these would be classified as asymmetric shocks between the two areas.
“Furthermore, common shocks are likely to have an asymmetrical effect on output and employment in Scotland relative to rUK since the industrial structures of the two areas is not the same.”
He concluded: “By failing to recognise these crucial issues, the Scottish Government’s exchange rate proposal cannot be a long run solution to the needs of an independent Scotland.”
Prof MacDonald, who has also advised numerous central banks on exchange rate issues, including the European Central Bank, Reserve Bank of New Zealand and Monetary Authority of Singapore, also highlighted the need for a “flexible” currency.
He added: “To avoid the potentially unpleasant consequences on employment and output of asymmetric and common shocks Scotland would need an independent currency and this currency would need to have some flexibility to absorb the shocks likely to buffet the Scottish economy.
“This could take the form of a managed float, much as in the recent Norwegian case, and could involve a basket of currencies determined by trade shares.”
A “managed” or “dirty float” is a system of floating exchange rates in which the government or the country’s central bank occasionally intervenes to change the direction of the value of the country’s currency.
In most instances, the intervention aspect is meant to act as a buffer against an external economic shock before its effects become truly disruptive to the domestic economy.
The system used by the UK is called a floating exchange rate system, which means the value of the currency is determined purely by demand and supply of the currency and there is no target for the exchange rate and no intervention in the market by the central bank.
Sterling has floated since the UK suspended membership of the ERM in September 1992 and the Bank of England has not intervened to influence the pound’s value since it became independent.
Prof MacDonald will be presenting his paper tonight at the launch of Glasgow University’s new policy institute, Policy Scotland.
A spokesperson for the Better Together campaign said: “What is best for Scotland, our people and our businesses is to keep the current arrangements. Every other option is much worse than what we currently enjoy.”