Do as I Do, and Also as I Say: Monetary Policy Impact on Brazil’s Financial Markets


We analyze how Brazilian financial markets, in particular interest rate futures, react to monetary policy in terms of both deeds (that is, changes in the policy rate) and words (that is, central bank communication). Using daily data from 2005 to 2014, we find that interest futures rates react in the expected direction to both the central bank’s actions and its words: futures rates rise (fall) after both an increase (decrease) in the reference interest rate and a hawkish (dovish) communication by the Central Bank of Brazil. We also find that the Central Bank’s words create noise, since they increase the volatility of futures rates. Our analysis further reveals that the effectiveness of monetary policy communication increased after the 2008 international crisis, as measured by its larger impact on future rates and reduced volatility. At the same time, deeds became less relevant: the effect of changes in the Central Bank’s policy rate on futures rates declined.