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

20 Pages Posted: 8 Oct 2008

See all articles by Mario Dehesa

Mario Dehesa

International Monetary Fund (IMF)

Pablo Druck

International Monetary Fund (IMF)

Date Written: September 2008

Abstract

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.

Keywords: Eastern Caribbean Central Bank, Caribbean, Working Paper, Loans, Bank credit, Monetary unions, Exchange rate stability, Liquidity management, Central bank role

Suggested Citation

Dehesa, Mario and Druck, Pablo, The Eastern Caribbean Central Bank: Challenges to an Effective Lender of Last Resort (September 2008). IMF Working Paper No. 08/214, Available at SSRN: https://ssrn.com/abstract=1278425

Mario Dehesa

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Pablo Druck

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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