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Financial market reactions to announcements of monetary policy decisions

Author

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  • Helder Ferreira de Mendonça
  • Ivando Faria

Abstract

Purpose - The purpose of this paper is to make an analysis of the Brazilian experience after the adoption of inflation targeting concerning the effects caused by the new practices of transparency and communication in the monetary policy. Design/methodology/approach - Changes in the financial market's expectations due to monetary policy actions are analyzed based on methodologies proposed by Cook and Hahn and Kuttner. Daily data from transactions in the interbank deposit futures market of the Securities, Commodities and Futures Exchange (BMF&BOVESPA) are used for the period July 1999‐January 2009. Two sub‐periods are also considered: the “maturation period” – the first phase of the effects caused by an increase in central bank transparency; and the “wisdom period” – the second phase in the financial market's perception regarding an environment with more transparency. Findings - The findings are in consonance with the idea that an increase in central bank transparency and communication improves the efficiency of expectations hypothesis of the term structure of interest rate and the anticipation of changes in the interest rate target. Originality/value - This study offers some new insights into how central bank communication improves the efficiency of the monetary policy for developing countries, which have adopted inflation targeting.

Suggested Citation

  • Helder Ferreira de Mendonça & Ivando Faria, 2013. "Financial market reactions to announcements of monetary policy decisions," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(1), pages 54-70, January.
    • Handle: RePEc:eme:jespps:v:40:y:2013:i:1:p:54-70
    DOI: 10.1108/01443581311283501
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    Citations

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    Cited by:

    1. Marins, Jaqueline Terra Moura & Vicente, José Valentim Machado, 2017. "Do the central bank actions reduce interest rate volatility?," Economic Modelling, Elsevier, vol. 65(C), pages 129-137.
    2. Thiago Cacicedo Cidad & Gabriel Caldas Montes, 2016. "Does Central Bank’S Perception Regarding The State Of The Economy Affect Entrepreneurs’ Expectations? Are Entrepreneurs’ Expectations Important For Investment? Empirical Evidence From Brazil," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 035, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    3. Helder Ferreira de Mendonça & Ivando Faria, 2015. "Brazilian Central Bank communication and interest rate expectations," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 8(1-2), pages 25-44, July.
    4. de Mendonça, Helder Ferreira & de Moraes, Claudio Oliveira, 2018. "Central bank disclosure as a macroprudential tool for financial stability," Economic Systems, Elsevier, vol. 42(4), pages 625-636.
    5. Juan Camilo Galvis Ciro & Helder Ferreira de Mendonça, 2017. "Effect of credibility and reputation on discretionary fiscal policy: empirical evidence from Colombia," Empirical Economics, Springer, vol. 53(4), pages 1529-1552, December.
    6. Gabriel Caldas Montes & Rodolfo Tomás da Fonseca Nicolay, 2015. "Central bank’s perception on inflation and inflation expectations of experts," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(6), pages 1142-1158, November.
    7. 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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