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Central Bank Communication Affects the Term-Structure of Interest Rates

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

Abstract

We empirically analyze how the Brazilian Central Bank (BCB) communication affects the term structure of future interest rates. Using principal components analysis, we construct a measure of the Monetary Policy Committee Minutes content that reflects policy makers optimism about the economic conditions. We call this measure the Optimism Factor (OF). When policy makers are more optimistic, reflected by increments in the OF, markets expectations respond and long-term future interest rates drop. Furthermore, when policy makers are pessimistic, reflected by a decrease in the OF, volatility on future interest rates increases. Our result indicates that policy maker communication has an effective impact on market expectations. Abstract Analisamos empiricamente como as atas do Banco Central do Brasil (BCB) afetam a estrutura a termos da taxa de juros. Usando Análise de Componentes Principais, construímos uma medida do conteúdo dessas atas que reflete o otimismo dos gestores de política monetária em relação às condições economicas. Nomeamos essa medida de Fator de Otimismo (OF). Quando os gestores estão mais otimistas, de forma que o OF aumenta, as taxas de juros de longo prazo caem respondendo às expectativas de mercados. Além disso, quando os gestores estão pessimistas, de modo que o OF cai, a volatilidade das taxas de juros futuras aumenta. Nossos resultados sugerem que a comunicação dos gestores de política monetária tem um impacto efectivo nas expectativas do mercado.

Suggested Citation

  • Chague, Fernando & De-Losso, Rodrigo & Giovannetti, Bruno & Manoel, Paulo, 2015. "Central Bank Communication Affects the Term-Structure of Interest Rates," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 69(2), June.
  • Handle: RePEc:fgv:epgrbe:v:69:y:2015:i:2:a:16342
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    Cited by:

    1. Luis Alberto Delgado-de-la-Garza & Gonzalo Adolfo Garza-Rodríguez & Daniel Alejandro Jacques-Osuna & Alejandro Múgica-Lara & Carlos Alberto Carrasco, 2021. "Does the use of a big data variable improve monetary policy estimates? Evidence from Mexico," Economics and Business Letters, Oviedo University Press, vol. 10(4), pages 383-393.
    2. Amoako, Frimpong & Asuamah Yeboah, Samuel, 2023. ""Community Voices in Control: A Systematic Review of Local Representation's Influence on RCB Governance Structure’’," MPRA Paper 118629, University Library of Munich, Germany, revised 10 Sep 2023.
    3. Azevedo, Luis Fernando Pereira & Pereira, Pedro L. Valls, 2018. "Effects of official and unofficial central bank communication on the Brazilian interest rate curve," Textos para discussão 470, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).

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