LIBOR as a Keynesian beauty contest: a process of endogenous deception

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    Abstract

    This paper uses the Keynesian Beauty Contest as a theoretical framework to analyse the London Interbank Offered Rate (LIBOR) fixing mechanism, where the actual money market rate is seen as a fundamental value towards which the LIBOR should aim. By treating the LIBOR as the outcome of a particular kind of p-beauty contest game, in which players (LIBOR banks) are guided by higher order beliefs, a process is created whereby they are not solely dependent on their own incentives and constraints. Instead, potential deception is generated endogenously though the fixing process itself, resulting in systematic deviations of the LIBOR from its fundamental value.
    Original languageEnglish
    Pages (from-to)392-407
    JournalReview of Political Economy
    Volume26
    Issue number3
    Early online date13 Jun 2014
    DOIs
    Publication statusPublished - 2014

    Keywords

    • London Interbank Offered Rate

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