Beyond LIBOR: Money Markets and the Illusion of Representativeness

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 paper 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: i) that they are related to but separate and distinct from the objects determining them and ii) that they are measurements and as such cannot be bought or sold (Stenfors and Lindo 2018). By doing so, the paper 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.