Impacts of the Monetary Policy Committee Decisions on the Foreign Exchange Rate in Brazil

José Vicente, Jaqueline Marins and Wagner Gaglianone

No 552, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The purpose of this paper is to measure the impact of interest rate decisions of the Monetary Policy Committee (MPC) on foreign exchange (FX) rate in Brazil. In this sense, two new daily measures of interest rate surprises are proposed using market and survey data, respectively. Overall, the results indicate a significant effect of MPC’s decisions on FX returns. In particular, the surprise variable, measured with market data, is statistically significant to explain FX returns and has a negative sign, as expected (a positive surprise implies an appreciation of the domestic currency). Moreover, this effect is symmetric, in terms of positive or negative surprises, and does not depend on the level of Selic interest rate. Nonetheless, the surprise variable seems not to be significant to explain FX returns in recent years, under a single-digit interest rate regime. Robustness exercises –using GARCH models to account for the second moment of FX rate returns or including FX market official intervention time series as additional control variables – corroborate the previous findings.

Date: 2021-06
New Economics Papers: this item is included in nep-cba and nep-mon
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