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

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  • Pablo Druck
  • Mario Dehesa
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    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.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/214.

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    Length: 49
    Date of creation: 01 Sep 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/214

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    Related research

    Keywords: Eastern Caribbean Central Bank; Bank credit; Exchange rate stability; Liquidity management; Central bank role;

    This paper has been announced in the following NEP Reports:

    References

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    1. Freixas, Xavier & Parigi, Bruno & Rochet, Jean-Charles, 2003. "The Lender of Last Resort: A 21th Century Approach," IDEI Working Papers 215, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. repec:imf:imfocp:224 is not listed on IDEAS
    3. Marie-Thérèse Camilleri Gilson, 2004. "An Institutional Framework for Comparing Emerging Market Currency Boards," IMF Working Papers 04/180, International Monetary Fund.
    4. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
    5. Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
    6. Pierre van den Boogaerde & Charalambos G. Tsangarides, 2005. "Ten Years After the CFA Franc Devaluation: Progress Toward Regional Integration in the WAEMU," IMF Working Papers 05/145, International Monetary Fund.
    7. Dong He, 2000. "Emergency Liquidity Support Facilities," IMF Working Papers 00/79, International Monetary Fund.
    8. Corrinne Ho, 2002. "A survey of the institutional and operational aspects of modern-day currency boards," BIS Working Papers 110, Bank for International Settlements.
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    Citations

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    Cited by:
    1. Wendell A. Samuel & Emilio Pineda & Mario Dehesa, 2009. "Optimal Reserves in the Eastern Caribbean Currency Union," IMF Working Papers 09/77, International Monetary Fund.

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