Just words?: A quantitative analysis of the communication of the Central Bank of Brazil

Abstract

We quantify the informational content of statements issued by the interest-rate setting committee of the Central Bank of Brazil (COPOM), building on the methodology developed by Lucca and Trebbi (2011). Using Google search queries, we measure the extent to which each CO-POM statement is perceived to be associated with more "hawkish" or "dovish" language. This allows us to construct a time-series of the informational content of COPOM statements, which we then use in regressions to explain changes in the term-structure of interest rates around COPOM meetings -together with a market-based measure of interest-rate surprises. We find that, during Governor Tombini's tenure, interest-rate surprises started to be "passed through" one-to-one (or more) even at long maturities, as markets seem to have bought into the idea that the interest-rate cuts that began in mid-2011 would lead to lower yields in Brazil into the foreseeable future. Most importantly, changes in the informational content of COPOM statements seem to have meaningful effects on yields at short-to-medium maturities. However, this result only holds for the period prior to Tombini's tenure. Lucca and Trebbi (2011). Por * Prepared for the workshop "Política Monetária: Estudos para o Brasil", held at IPEA in Rio de Janeiro, June 2013. We thank participants and an anonynous referee for their comments and suggestions. Remaining errors are our own. This paper incorporates results from Vargas (2012) Neste artigo nós quantificamos o conteúdo informacional dos comunicados do Comitê de Política Monetária do Banco Central do Brasil (COPOM), com base na metodologia desenvolvida por

Central Bank Communication Affects the Term-Structure of Interest Rates

“…Our paper is more related to Costa Filho and Rocha (2010) and Carvalho, Cordeiro, and Vargas (2013). The former authors also investigate how the BCB communication influences future interest rates.…”

What lf Brazil Hadn't Floated the Real in 1999?

“…7 Although it is always possible understanding of the topic. 6 For recent papers on changes in monetary policy in Brazil since the implementation of the inflation targeting regime, see Berriel et al (2013), Carvalho et al (2013) e Gonçalves (2015.…”

The Impact of Monetary Policy on Asset Prices: A High-Frequency Approach for Brazil

“…The first paper studying reactions for the Brazilian interest rate curve was Tabak ( 2004), which analysed maturities up to 12 months and used the methodology in Cook and Hahn (1989) Wu (2012) assesses the impact of the monetary surprise on the interest rate curve for the period of 2004 to 2008 using a VAR containing macroeconomic surprises as well as asset prices, namely the exchange rate and the CDS changes, finding a positive reaction of yields of maturities up to 12 months, which declines for the 24 month maturity. Carvalho et al (2013) use a similar approach to that in Kuttner (2001) for the period of 2007-2013, however they also quantify informational effects of monetary policy using sentiment analysis applied to statements released by the central bank, and check for non-linearities in the responses. While prior to January 2011 (when Alexandre Tombini became governor of the central bank), effects decreased with maturities, with long rates pricing in a reversal of interest rate surprises, after this period, reactions increased for yields of up to 12 months, and declined for longer rates, which still responded close to one-to-one to interest rate surprises.…”

“…While prior to January 2011 (when Alexandre Tombini became governor of the central bank), effects decreased with maturities, with long rates pricing in a reversal of interest rate surprises, after this period, reactions increased for yields of up to 12 months, and declined for longer rates, which still responded close to one-to-one to interest rate surprises. A closely related paper, Machado (2014), extends Carvalho et al (2013), including intraday responses on the trading day following the target announcement. Amarante (2015) combines a recursively identified VAR with factors extracted using PCA to study if the interest rate curve response to the monetary surprise changed in the period of 2011-2015 with respect to 2000-2010.…”

“…Following Carvalho et al (2013), the surprise is the difference between the 30-day Swap DI × Pré on the first trading day after the COPOM decision and the 30-day rate on the decision day. Because COPOM meetings occur at least 30 days apart, and assuming negligible risk premia for short-term contracts, 30-day contracts on the day of the announcement essentially reflect market expectations of the upcoming interest-rate decision, such that by analysing their change after the announcement, we extract the desired shock.…”