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.
Highlights
In the recent scenario of low interest rates in the U.S and in the Euro zone, the use of alternative monetary policy instruments has been an important research topic
In this work we provide empirical evidence that central bank communication has an effective impact on market expectations
We show that the content of the Brazilian Central Bank (BCB) minutes affects long-term interest rates and the volatility of future interest rates.
Summary
COPOM, Central Bank, Communication, Semantic, Term-structure of Interest Rates, Monetary Policy, Optimism Factor. We empirically analyze how the Brazilian Central Bank (BCB) communication affects the term structure of future interest rates. 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). 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. 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. Nossos resultados sugerem que a comunicação dos gestores de política monetária tem um impacto efectivo nas expectativas do mercado
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