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

The Eastern Caribbean Central Bank: Challenges to an Effective Lender of Last Resort by Pablo Druck
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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.
International Monetary Fund; September 2008
18 pages; ISBN 9781452707709
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Title: The Eastern Caribbean Central Bank: Challenges to an Effective Lender of Last Resort
Author: Pablo Druck; Mario Dehesa
 
ISBNs
145191525X
9781451870725
9781451915259
9781452707709