Scottish independence in an interdependent world: New evidence
Andrew Hughes Hallett 20 June 2014
The UK and Scottish governments are engaged in a set of parallel and overlapping games in the economic and political arenas. This column presents research that analyses how decisions about whether to cooperate over financial regulation, fiscal rules, and the choice of currency and monetary policy, will all have far reaching implications for a newly independent Scotland and the rest of the UK.
Any economy must have a policy framework designed to manage the three basic macroeconomic imbalances:
- The private financing (savings-investment) gap;
- The public spending-revenues (fiscal) gap; and
- The foreign financing (trade) gap.
These imbalances imply a need for financial regulation, fiscal rules, and a currency/monetary policy choice, respectively. A newly independent Scotland would be no exception.
Europe's nations and regions Monetary policy
monetary independence, currency union, Scotland, Scottish independence
A well-designed sterling union will be needed if Scotland votes for independence
Oliver Harvey, George Saravelos 28 May 2014
Much ink has been spilled over Scotland’s currency options in the event of independence. This column argues that a breakup of the sterling area would be truly unprecedented. The sterling union is unique because it services a unitary state with a highly integrated and complex financial sector, an indivisible payments system, and an overlapping legal system. Politics aside, neither a unilateral nor a mutual break-up would be credible, leaving a negotiated currency union as the only option. However, as the Eurozone crisis demonstrates, a badly designed currency union could be exceptionally costly.
The currency options of an independent Scotland have become a crucial point of contention for both sides ahead of the September 2014 referendum. However, the debate has so far focused on the suitability of different regimes based on the optimal currency area framework or fiscal implications (Armstrong 2013). There has been little focus on the practical issues involved. This is problematic because a breakup of the sterling area would be historically unprecedented and uniquely complex.
Europe's nations and regions Monetary policy
monetary independence, currency union, Bank of England, Currency unions, Scotland, sterling, Scottish independence
Assessing the emerging global financial architecture: Measuring the trilemma's configurations over time
Joshua Aizenman, Menzie D. Chinn , Hiro Ito 09 January 2009
Is the trinity impossible? This column traces the evolution of the three aspects of the trilemma – exchange rate stability, monetary independence, and financial integration – across countries over the last four decades. A rise in one trilemma variable does result in a drop of a linear weighted sum of the other two.
Against the backdrop of the most severe financial crisis since the Great Depression, the issue of the trilemma – the hypothesis that a country may only achieve at most two of three goals: monetary independence, exchange rate stability, and financial integration – seems rather distant. We would argue that, on the contrary, the way in which the trilemma has been addressed and how it will constrain future policy choices are questions that need to be answered in order to understand how the world economy has arrived at this juncture.
International finance Macroeconomic policy
financial integration, monetary independence, Trilemma, exchange rate stability
Why have currency unions dissolved? A test of optimum currency area theory
Andrew K Rose 06 February 2008
Since World War II, economies have exited currency unions at an average rate of one per year. Yet the evidence confounds established theory: economists are unable to predict which economies are likely to leave currency unions.
The euro’s success has piqued the world’s interest in currency unions. The Gulf Cooperation Council is planning to establish one by 2010, the South African Development Community by 2018 and plans for an Asian currency union have circulated for years. Peter Kenen and Ellen Meade have a new book that surveys the prospects for regional monetary integration around the globe.1
Global economy Monetary policy
euro, EMU, monetary independence, currency union, membership
Reframing the debate about the Chinese Renminbi
Marvin Goodfriend, Eswar Prasad 22 August 2007
US and EU pressure on China to revalue the renminbi create the mistaken impression that there is an unavoidable conflict of interests. A switch by China to a more flexible exchange rate regime, accompanied by a shift to a new nominal anchor, would serve China’s domestic interests and simultaneously defuse protectionist sentiments abroad. A politically savvy recasting of this issue as one of Chinese monetary-policy independence could help solve many problems.
As the US trade deficit continues to swell, the denizens of Capitol Hill are back on the warpath against their favourite bogeyman—the Chinese economy. The rising US bilateral trade deficit with China provides ammunition (made in China!) for those who want to argue that Chinese trade policies are at the root of the problem. The rising trade deficit of the European Union with China has led to similar sentiments among some European politicians.
China, renminbi, flexible exchange rate, Renminbi appreciation, monetary independence