An independent Scotland is likely to be more constrained on economic policy than as part of the UK, according to a research paper.

The National Institute of Economic and Social Research, based in London, examined monetary and fiscal policy choices facing Scotland if it leaves the union.

The report, by Dr Angus Armstrong, found it would be "sensible" to retain sterling, as proposed by Finance Secretary John Swinney, but said that course of action would have its own problems.

Mr Swinney, in a newspaper interview earlier in the week, said he cannot envisage the economic conditions being correct for the euro "for some considerable time".

However, the institute's report argues that it is "doubtful" if the Bank of England would extend lender-of-last-resort facilities to Scottish institutions, something First Minister Alex Salmond has argued for.

Dr Armstrong said fiscal balances will be volatile because of heavy reliance on oil, and that Scotland would be open to the threat of default.

The report adds: "With a pro rata transfer of existing UK public debt, Scotland would enter independence heavily indebted with no insurance from fiscal risk sharing or fiscal transfer mechanism with the rest of the UK.

"Even with a favourable settlement on future oil revenues, its fiscal balances are likely to be volatile with large deficits in some years as a result of its dependence on oil revenues."

'Windfall gains'

The report continues: "An independent Scotland is therefore likely to find the implicit constraints on economic policy, especially fiscal policy, are even more restrictive than the explicit ones it faces as part of the UK."

Dr Armstrong said the political union means risks can be shared by the four parts of the UK. He highlighted "windfall gains" from North Sea oil and losses incurred by banks.

The National Institute of Economic and Social Research bills itself as Britain's longest established independent economic research institute with more than 60 years' experience.

The institute says it is independent of all party political interests and receives no core funding from government.

Mr Swinney said the report "validates" the policy to retain sterling after independence.

He added: "As we have set out, there are strong benefits for the rest of the UK as well as Scotland in being part of a currency union. For example, Oil and Gas UK estimate that this sector alone boosted the UK's balance of trade in goods and services by £32bn in 2010, almost halving the UK's deficit.

"Scotland's international exports are worth £22bn, with whisky exports alone contributing £3.3bn."

He said Scotland would be in a "healthier" position than the UK as a whole, with public sector debt currently lower than the EU and G7 average.

Mr Swinney added: "By keeping sterling after independence, we will have exactly the same relationship with the central bank as the Westminster Chancellor does, who has not set interest rates since 1997."

Scottish Labour leader Johann Lamont said: "Alex Salmond doesn't put the economic case for independence because there isn't one.

"When people are worried about their jobs, homes and the cost of living, Alex Salmond's assertions are not good enough for the people of Scotland.

"The report highlights the strength of working in partnership with our neighbours.

"Scotland benefits from being a full part of the UK, where together we can share risks and build stability.

"Our economies are so closely interlinked that turning our closest neighbour into our biggest competitor is not in Scotland's interest."

She added: "This matters because it affects every person and family, everyone in work and looking for work, and every business in every village, town and Scotland.

"In recent days the SNP's economic claims are being tested to breaking point."