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Do as I Do, and Also as I Say: Monetary Policy Impact on Brazil’s Financial Markets

Author

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  • Alicia Garcia-Herrero
  • Eric Girardin
  • Enestor Dos Santos

Abstract

We analyze how Brazilian nancial markets, in particular interest rate futures, react to monetary policy in terms of both deeds (that is, changes in the policy rate) and words (that is, central bank communication). Using daily data from 2005 to 2014, we nd that interest futures rates react in the expected direction to both the central bank’s actions and its words: futures rates rise (fall) after both an increase (decrease) in the reference interest rate and a hawkish (dovish) communication by the Central Bank of Brazil. We also nd that the Central Bank’s words create noise, since they increase the volatility of futures rates. Our analysis further reveals that the effec- tiveness of monetary policy communication increased after the 2008 international crisis, as mea- sured by its larger impact on future rates and reduced volatility. At the same time, deeds became less relevant: the effect of changes in the Central Bank’s policy rate on futures rates declined.

Suggested Citation

  • Alicia Garcia-Herrero & Eric Girardin & Enestor Dos Santos, 2017. "Do as I Do, and Also as I Say: Monetary Policy Impact on Brazil’s Financial Markets," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 65-92, April.
    • Handle: RePEc:col:000425:015505
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    Cited by:

    1. Sui-Jade Ho & Ozer Karagedikli, 2021. "Effects of monetary policy communication in emerging market economies: Evidence from Malaysia," CAMA Working Papers 2021-67, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Lin, Jianhao & Mei, Ziwei & Chen, Liangyuan & Zhu, Chuanqi, 2023. "Is the People's Bank of China consistent in words and deeds?," China Economic Review, Elsevier, vol. 78(C).

    More about this item

    Keywords

    monetary policy; communication; interest rates; central banks;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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