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Central Bank Communication Affects Long-Term Interest Rates

Author

Listed:
  • Fernando D. Chague
  • Rodrigo De-Losso, Bruno C. Giovannetti, Paulo Manoel

Abstract

We empirically study how the communication of the Central Bank of Brazil affects the term structure of interest rates. Using an algorithm that classifies the words from the Central Bank minutes into predetermined semantic themes, we estimate a time-series factor related to Central Bank optimism. Then, we show that the long-term interest rates are sensitive to the optimism factor: when Central Bank is more optimistic, long-term interest rates fall. The fact that minutes are released one week after the changes in the target rate allows us to identify the effect of the communication in isolation. Our result is in line with the idea that Central Bank communication can be an effective monetary policy instrument through its impact on market expectations, particularly at the longer maturities.

Suggested Citation

  • Fernando D. Chague & Rodrigo De-Losso, Bruno C. Giovannetti, Paulo Manoel, 2013. "Central Bank Communication Affects Long-Term Interest Rates," Working Papers, Department of Economics 2013_07, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2013wpecon7
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    File URL: http://www.repec.eae.fea.usp.br/documentos/ChagueDe_LossoGenaroGiovannetti07WP.pdf
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    References listed on IDEAS

    as
    1. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    2. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    3. Carlo Rosa, 2011. "Talking Less And Moving The Market More: Evidence From The Ecb And The Fed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(1), pages 51-81, February.
    4. David O. Lucca & Francesco Trebbi, 2009. "Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements," NBER Working Papers 15367, National Bureau of Economic Research, Inc.
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    Cited by:

    1. David Bholat & Stephen Hans & Pedro Santos & Cheryl Schonhardt-Bailey, 2015. "Text mining for central banks," Handbooks, Centre for Central Banking Studies, Bank of England, number 33, April.
    2. Alicia Garcia-Herrero & Eric Girardin & Enestor Dos Santos, 2015. "Follow what I do and also what I say: monetary policy impact on Brazil’s financial markets," Working Papers 1512, BBVA Bank, Economic Research Department.

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    More about this item

    Keywords

    Brazilian Central Bank; central bank communication; text mining;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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