LIBOR was conceived in a world where the market’s current complexity was not anticipated and when monetary policy setters were not as independent or predictable as they are today. LIBOR had been an effective transmission mechanism for policy rates into the real economy, but during the global financial crisis of 2008 as banking went into a crisis, the bases underpinning LIBOR fell apart.
Key learning objectives:
Explain the origins of LIBOR and how it is calculated
What happened to destabilise LIBOR during the global financial crisis?