The market reaction to changes in the Brazilian official interest rate

Abstract

This study is aimed at investigating the effects of monetary policymaking on the short-term and long-term interest rates for the Brazilian economy for the period August 1999 to March 2011. It is shown that the reversal of the current account deficit and the alleviation of political uncertainties in 2003 affect the impact of monetary policy on market interest rates. In particular, it is observed that surprises in policymaking are substantially reduced after the macroeconomic and political stability.

Keywords:

• Brazil
• Central Bank
• monetary policy
• structural break
• target rate
• term structure

JEL Classification:

• E4
• G1

Notes

¹ DI × pre-swap rates are futures contracts in which a part pays a fixed rate over an agreed principal and receives a floating rate over the same principal, while the reverse occurs with his or her counterpart. There are no intermediate cash flows; the contracts are only settled on maturity.