Follow What I Do, and Also What I Say: Monetary Policy Impact on Brazil's Financial Markets

Economia, 17(2):65-92, 2017

28 Pages Posted: 30 Apr 2018

See all articles by Alicia García-Herrero

Alicia García-Herrero

Natixis ; BBVA Research; Bruegel

Eric Girardin

University Aix-Marseille 2 - GREQAM

Enestor Dos Santos

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) - Research Department

Date Written: January 1, 2017

Abstract

We analyze how Brazilian financial markets, in particular futures interest rates, react to monetary policy both in terms of deeds, i.e. changes in the policy rate, and words, i.e. central bank communication. Using daily data from 2005 to 2014, we find that the futures interest rates react in the expected direction to both the central bank’s actions and words, namely futures rates do increase (decrease) after both an increase in the reference interest rate and a hawkish (dovish) communication by the Banco Central do Brasil (BCB). We also find that BCB words create more “noise”, since they generate an increased volatility of futures rates. Our analysis also reveals that monetary policy communication has increased its effectiveness – measured by its larger impact on future rates and a reduced volatility- after the 2008 international crisis. At the same time, the deeds became less relevant as the effect of the changes in the SELIC rate on future rates has declined since then.

Keywords: Monetary Policy; Communication; Interest Rates; Brazil; COPOM; Central Bank

JEL Classification: E52, E58; E43

Suggested Citation

Garcia-Herrero, Alicia and Girardin, Eric and Dos Santos, Enestor, Follow What I Do, and Also What I Say: Monetary Policy Impact on Brazil's Financial Markets (January 1, 2017). Economia, 17(2):65-92, 2017. Available at SSRN: https://ssrn.com/abstract=3160537

BBVA Research ( email )

C/ Azul,4. Edificio La Vela. Planta 4
Madrid, 28050
Spain

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

Eric Girardin

University Aix-Marseille 2 - GREQAM ( email )

Centre de la Vieille Charité
Marseille, 13 002
France

Enestor Dos Santos

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) - Research Department ( email )

Paseo de Recoletos, 10
Madrid
Spain

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