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The asymmetry and uncertainty effects on the response of the yield curve to Brazilian monetary policy

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  • Cavaca, Igor Bastos
  • Meurer, Roberto

Abstract

We investigate the influence of the Central Bank of Brazil’s Monetary Policy Committee (COPOM) decisions on the term structure of interest rate. We consider four possible drivers of market movements: (i) the effective surprise in the decision compared to market expectations; (ii) the asymmetric market responses to positive or negative changes in the monetary policy interest rate; (iii) the influence of economic uncertainty around meetings; and (iv) the effects of these changes on market behavior over time. We find that the monetary surprise coefficients have negative values for long-term rates. Moreover, we find an asymmetric response of the sign of the change in the monetary policy interest rate. There is evidence that, in general, positive changes in the interest rate are more difficult to predict by the market. Higher uncertainty increases the effect of the monetary policy surprise component in the short-term and reduces the effect in the long-term yield rates. Moreover, there is a reduction in the impact of the surprise component on the Brazilian interest rate market over time.

Suggested Citation

  • Cavaca, Igor Bastos & Meurer, Roberto, 2024. "The asymmetry and uncertainty effects on the response of the yield curve to Brazilian monetary policy," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 831-844.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:831-844
    DOI: 10.1016/j.iref.2023.07.042
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    1. Priya, Pragati & Sharma, Chandan, 2025. "The uncertainty-driven channel of monetary transmission on household consumption: the role of households’ balance sheet positions," International Review of Economics & Finance, Elsevier, vol. 103(C).

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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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