The Eastern Caribbean Central Bank: Challenges to an Effective Lender of Last Resort

September 1, 2008

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Pablo F Druck, and Mario Dehesa. The Eastern Caribbean Central Bank: Challenges to an Effective Lender of Last Resort, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper analyzes the challenges for the Eastern Caribbean Central Bank (ECCB) to be an effective lender of last resort (LOLR) as part of a modern banking crisis resolution framework. The main results from the theoretical model of the ECCB's institutional arrangement are that the majority of currency union members may veto emergency lending in the case of a member-specific shock, as such lending may endanger the stability of the currency board (by lowering the central bank's international reserves, thus raising devaluation risk). However, in the presence of contagion across countries, all currency union members have a vested interest in liquidity supply from the central bank. A key policy recommendation is that currency union members need a stronger fiscal position to continue to access international financial markets and sustain the exchange rate peg.

Subject: Banking, Exchange rate risk, Lender of last resort, Liquidity, Monetary unions

Keywords: Central bank, Liquidity assistance, WP

Publication Details

Pages:

18
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/214
Stock No:

WPIEA2008214
ISBN:

9781451870725
ISSN:

1018-5941

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