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Beyond LIBOR: Money Markets and the Illusion of Representativeness

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  • Lilian Muchimba
  • Alexis Stenfors

Abstract

Money market benchmarks are important indicators for economic agents. They are also crucial for central banks in assessing the functioning of the interest rate channel of the monetary transmission mechanism. However, whereas the unsecured interbank money market conventionally has been seen as encompassing instruments with maturities up to one year, it appears as if it consists of two markets. The ultra-short-term money market (typically just one day) is large, liquid, and traded regularly. The term money market (one, three or six months), by contrast, is small, illiquid and rarely traded. This article explores the feasibility of creating and maintaining a money market benchmark which does not represent an underlying liquid market. From a sociological perspective, it addresses two critical aspects of financial benchmarks: (1) that they are related to but separate and distinct from the objects determining them and (2) that they are measurements and as such cannot be bought or sold (Stenfors and Lindo 2018). By doing so, the article also reflects upon the desire by financial regulators following the LIBOR manipulation scandal to replace estimation-based by transaction-based benchmarks, as well as some challenges and contradictions in conventional central banking theory.

Suggested Citation

  • Lilian Muchimba & Alexis Stenfors, 2021. "Beyond LIBOR: Money Markets and the Illusion of Representativeness," Journal of Economic Issues, Taylor & Francis Journals, vol. 55(2), pages 565-573, April.
    • Handle: RePEc:mes:jeciss:v:55:y:2021:i:2:p:565-573
    DOI: 10.1080/00213624.2021.1915085
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    References listed on IDEAS

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    1. Donald Mackenzie & Fabian Muniesa & Lucia Siu, 2007. "Do Economists Make Markets? On the Performativity of Economics," Post-Print halshs-00149145, HAL.
    2. 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.
    3. Annina Kaltenbrunner & Juan Pablo Painceira, 2017. "The Impossible Trinity: Inflation Targeting, Exchange Rate Management and Open Capital Accounts in Emerging Economies," Development and Change, International Institute of Social Studies, vol. 48(3), pages 452-480, May.
    4. Andreas Schrimpf & Vladyslav Sushko, 2019. "Beyond LIBOR: a primer on the new benchmark rates," BIS Quarterly Review, Bank for International Settlements, March.
    5. 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.
    6. Donald MacKenzie & Fabian Muniesa & Lucia Siu, 2007. "Introduction to Do Economists Make Markets? On the Performativity of Economics," Introductory Chapters, in: Donald MacKenzie & Fabian Muniesa & Lucia Siu (ed.),Do Economists Make Markets? On the Performativity of Economics, Princeton University Press.
    7. 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).
    8. George Argitis, 2008. "Inflation targeting and Keynes's political economy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 31(2), pages 249-270, December.
    9. Stenfors Alexis & Susai Masayuki, 2018. "High-Frequency Trading, Liquidity Withdrawal, and the Breakdown of Conventions in Foreign Exchange Markets," Journal of Economic Issues, Taylor & Francis Journals, vol. 52(2), pages 387-395, April.
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    Cited by:

    1. Lilian Muchimba, 2021. "Could transaction-based financial benchmarks be susceptible to collusive behaviour?," Working Papers in Economics & Finance 2021-11, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    2. Lilian Muchimba, 2022. "Connectedness of money market instruments: A time-varying vector autoregression approach," Working Papers in Economics & Finance 2022-07, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    3. Alexis Stenfors & Lilian Muchimba, 2023. "The Anatomy of Three Scandals: Conspiracies, Beauty Contests, and Sabotage in OTC Markets," Journal of Economic Issues, Taylor & Francis Journals, vol. 57(2), pages 538-545, April.

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    More about this item

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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