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LIBOR deception and central bank forward (mis-)guidance: Evidence from Norway during 2007–2011

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  • Stenfors, Alexis

Abstract

This paper is an empirical investigation into the Norwegian Interbank Offered Rate (NIBOR) during 2007–11. It is demonstrated that an informal rule change to the benchmark fixing mechanism, instigated by the NIBOR panel banks, not only increased the susceptibility of the benchmark to deception, but also fundamentally changed the decomposition of the domestic money market risk premium. It resulted in a greater dependency on the Eurozone money markets and the ability of Eurozone banks to raise U.S. dollar funding. As a result, Norway faced both higher, and more volatile, money market risk premia since Q4 2008 – having considerable impact on forward guidance within monetary policy.

Suggested Citation

  • Stenfors, Alexis, 2014. "LIBOR deception and central bank forward (mis-)guidance: Evidence from Norway during 2007–2011," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 452-472.
    • Handle: RePEc:eee:intfin:v:32:y:2014:i:c:p:452-472
    DOI: 10.1016/j.intfin.2014.07.006
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    References listed on IDEAS

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    1. McAndrews, James & Sarkar, Asani & Wang, Zhenyu, 2017. "The effect of the term auction facility on the London interbank offered rate," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 135-152.
    2. Abrantes-Metz, Rosa M. & Kraten, Michael & Metz, Albert D. & Seow, Gim S., 2012. "Libor manipulation?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 136-150.
    3. Glenn D. Rudebusch & John C. Williams, 2008. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Chapters, in: Asset Prices and Monetary Policy, pages 247-289, National Bureau of Economic Research, Inc.
    4. Poskitt, Russell & Waller, Bradley, 2011. "Do liquidity or credit effects explain the behavior of the BKBM-LIBOR differential?," Pacific-Basin Finance Journal, Elsevier, vol. 19(2), pages 173-193, April.
    5. Lars E.O. Svensson, 2006. "The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example," Working Papers 75, Princeton University, Department of Economics, Center for Economic Policy Studies..
    6. Campbell, John Y. (ed.), 2008. "Asset Prices and Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, number 9780226092119, September.
    7. Lars E.O. Svensson, 2006. "The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example," Working Papers 75, Princeton University, Department of Economics, Center for Economic Policy Studies..
    8. repec:pri:cepsud:127svensson is not listed on IDEAS
    9. Andersson, Magnus & Hofmann, Boris, 2009. "Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters," Working Paper Series 1098, European Central Bank.
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    Citations

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    Cited by:

    1. Alexis Stenfors, 2019. "The Covered Interest Parity Puzzle and the Evolution of the Japan Premium," Journal of Economic Issues, Taylor & Francis Journals, vol. 53(2), pages 417-424, April.
    2. Bariviera, Aurelio F. & Martín, María T. & Plastino, Angelo & Vampa, Victoria, 2016. "LIBOR troubles: Anomalous movements detection based on maximum entropy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 449(C), pages 401-407.
    3. Alexis Stenfors & Lilian Muchimba, 2023. "The Transmission Mechanism of Stress in the International Banking System," Working Papers in Economics & Finance 2023-03, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    4. Alexis Stenfors, 2014. "Financialisation and the Financial and Economic Crises: The Case of Sweden," FESSUD studies fstudy27, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    5. Chatziantoniou, Ioannis & Gabauer, David & Stenfors, Alexis, 2020. "From CIP-deviations to a market for risk premia: A dynamic investigation of cross-currency basis swaps," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).
    6. Stenfors, Alexis & Chatziantoniou, Ioannis & Gabauer, David, 2022. "Independent policy, dependent outcomes: A game of cross-country dominoes across European yield curves," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    7. Stenfors, Alexis, 2018. "Bid-ask spread determination in the FX swap market: Competition, collusion or a convention?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 54(C), pages 78-97.
    8. Alexis Stenfors & Ioannis Chatziantoniou & David Gabauer, 2022. "The Evolution of Monetary Policy Focal Points," Journal of Economic Issues, Taylor & Francis Journals, vol. 56(2), pages 348-355, April.
    9. Aurelio Fernandez Bariviera & María Belén Guercio & Lisana B. Martinez & Osvaldo A. Rosso, 2015. "The (in)visible hand in the Libor market: an information theory approach," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 88(8), pages 1-9, August.

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    More about this item

    Keywords

    LIBOR; Manipulation; Collusion; Forward guidance; Monetary policy;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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