Financial market reactions to announcements of monetary policy decisions: Evidence from the Brazilian case

Abstract

Purpose

The purpose of this paper is to make an analysis of the Brazilian experience after the adoption of inflation targeting concerning the effects caused by the new practices of transparency and communication in the monetary policy.

Design/methodology/approach

Changes in the financial market's expectations due to monetary policy actions are analyzed based on methodologies proposed by Cook and Hahn and Kuttner. Daily data from transactions in the interbank deposit futures market of the Securities, Commodities and Futures Exchange (BMF&BOVESPA) are used for the period July 1999‐January 2009. Two sub‐periods are also considered: the “maturation period” – the first phase of the effects caused by an increase in central bank transparency; and the “wisdom period” – the second phase in the financial market's perception regarding an environment with more transparency.

Findings

The findings are in consonance with the idea that an increase in central bank transparency and communication improves the efficiency of expectations hypothesis of the term structure of interest rate and the anticipation of changes in the interest rate target.

Originality/value

This study offers some new insights into how central bank communication improves the efficiency of the monetary policy for developing countries, which have adopted inflation targeting.

Citation

Ferreira de Mendonça, H. and Faria, I. (2013), "Financial market reactions to announcements of monetary policy decisions: Evidence from the Brazilian case", Journal of Economic Studies, Vol. 40 No. 1, pp. 54-70. https://doi.org/10.1108/01443581311283501