I am looking at the imf interest rate data page for Sweden right now. There are two different interest rate indicators named "Central Bank Policy Rate" and "Money Market Rate". I know what policy rate is but I have no idea about money market rate. Their monthly values are really similar but not exactly the same. What is "money market rate"? If I would have used money market rate instead of policy rate to compare different interest rates of different countries would that be sound?
1 Answer
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The money market rate is the interest rate at money market which is market where highly liquid assets are traded (see more about this at Investopedia). It is called money market because in economics very liquid assets can also be considered to be 'broad money.'
The rate at money market rate and central bank policy rate will be similar because the policy rate influences all other interest rates in economy and has very large influence on money market since the price at which banks can borrow from central bank will directly affect the price of funds at money market.
Regarding your question:
If I would have used money market rate instead of policy rate to compare different interest rates of different countries would that be sound?
Well that depends on what is your research question. Depending on specific of your research using central bank interest rate might be more appropriate or less appropriate or you might consider using one as a proxy for other.
For example, in some research about transmission of monetary policy it will be important to distinguish between them because money market interest rate is one of the channels through which the central bank's policy (set with its policy rate) is transmitted to economy (e.g. like in Abbassi & Linzert, 2012).
In some other research where this transmission mechanism is of no interest you might use as a simplification only money market rate, or vice versa skip the money market rate and use policy rate directly as money market rate will be some function of policy rate.
Whether such simplification is justified is research specific. For example, in economics risk free rate and government bonds rate are completely distinct rates but if you can justify saying that it is virtually impossible for Germany to default so its bond rate will have very little risk and will be almost as good as risk free rate then you can use it in a research instead of risk free rate. However, while that justification might fly now, it would be dismissed in first half of 20centruy when Germany had large default risk. The point is that although they are not same you can depending on context justify one as approximation of other (science is in the end all based on approximation - even in physics you don't deal with exact results and infinite precision).
