George Osborne has been accused of a "a subterfuge to frighten Scottish citizens" by ruling out a currency union between the UK government and an independent Scotland to keep the pound, with an expert accusing him of "confused logic and inadequate economics."
Professor Leslie Young, from the Cheung Kong Graduate School of Business in Beijing, China, found that a currency union would result in "substantial costs", but remains the best option for the economies of the countries involved in the event of a Yes vote.
Prof Young was tasked with considering currency options for an independent Scotland by businessman Sir Tom Hunter's specially-launched organisation which aims to provide "definitive analysis on the key issues" in relation to the referendum.
Referring to what he called "conclusion A", Prof Young said the formation of a currency union, "even under the best circumstances", would result in "substantial costs to both economies compared to their current situation as members of the United Kingdom".
He said: "If Scotland votes for independence, then a currency union with rUK would be better for both economies than Scotland's other currency options: unilateral use of the pound sterling, a currency board, an independent currency with a flexible exchange rate and joining the eurozone."
A currency union is the preferred option of the Scottish Government but the UK Government has ruled this out, stating that it would not be in either countries' interests. Osborne warned that "if Scotland walks away from the U.K, it walks away from the pound".
Scotland's First Minister Alex Salmond has accused the Treasury of bluffing.
Prof Young said he arrived at the view that a currency union remains the best option in the event of independence by comparing how both countries' economies would function under the various other options if Scotland were subject to a reckless fiscal policy, financial instability or a drop in oil prices.
He said: "The Treasury presented these contingencies as reasons to oppose a currency union; they turn out to be reasons to advocate it over an independent Scotland's other currency options.
"I then offer three general arguments in favour of a currency union: it offers microeconomic advantages to both economies that are likely to outweigh any macroeconomic advantages from the other currency options; it better insulates both economies from international disturbances; and it minimises the massive legal issues that both economies would face immediately if Scotland switched to a new currency."
Prof Young went on to say that the UK Government has used an "inflated and unwarranted" version of the argument that the status quo is the best of option for Scotland and the rest of the UK to argue that a currency union should not be entertained if Scotland votes for independence.
He said: "The analysis of this paper thus leaves only two explanations for this stance by the UK Government, which has shaped the current debate on Scotland's currency: either confused logic and inadequate economics, or a subterfuge to frighten Scottish citizens to vote against independence by raising the spectre of economic chaos immediately afterwards.
"Neither explanation does the UK Government much credit but Scottish citizens should not let annoyance at this distract them from conclusion A above."
Commenting on the analysis, Sir Tom Hunter said: "Prof Young's analysis on this one narrow line of inquiry highlights the status quo as the best option for business.
"He also highlights precisely why both for Scotland and rUK that in the event of a vote for independence a currency union is by far the best option.
"Given the political manoeuvring around this subject, I think he underscores the point that the independence vote is way too important to be left to the politicians alone."
Speaking in Edinburgh today, chief Treasury secretary Danny Alexander said: "The decision to say a currency union would not work for either an independent Scotland or the rest of the UK was taken after a very detailed analysis.
"The basic argument is that both Scotland and the UK are both better off with the current state of affairs, a common currency in a unified state.
"As I understand it, actually this report backs that as all the other options would be worse for businesses in Scotland than the currency arrangements of keeping the UK together.
"I look at this as a Scot, as someone who would have to live with the consequence of this if we vote for independence.
"I think trying to sell people independence on the basis of a currency union is a bit like trying to sell people a car with the steering wheel column disabled."
A spokesman for Scotland's Finance Secretary John Swinney said: "This paper adds to the growing criticism of the UK Government's position on currency, whilst accepting that it offers no conclusions on independence itself.
"As the Scottish Government and the Fiscal Commission have set out, a currency union is in the best interests of Scotland and the United Kingdom and any sensible analysis by the Treasury would have shown that.
"Instead of continuing with the farcical position of opposing a currency union which is now widely recognised as right for Scotland, for the UK and for business, the UK Government should prepare for the kind of sensible negotiations Prof Young highlights."
A Treasury spokesman said: "This analysis confirms the Treasury's fundamental conclusion that the best currency option for Scotland is to say 'no thanks' to independence.
"A currency union or any other form of currency solution, should Scotland vote for independence, creates uncertainty and risk, and risk creates cost for business."