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

Author/Editor:

Pablo F Druck ; Mario Dehesa

Publication Date:

September 1, 2008

Electronic Access:

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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.

Series:

Working Paper No. 2008/214

Subject:

Banking Exchange rate risk Lender of last resort Liquidity Monetary unions

English

Publication Date:

September 1, 2008

ISBN/ISSN:

9781451870725/1018-5941

Stock No:

WPIEA2008214

Pages:

18

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