Monetary Policy E¤ects on the Yield Curve: the Brazilian experience from 2004 to 2008

This paper provides empirical evidence of the inuence exerted by the Monetary Policy Committee of the Central Bank of Brazil (Copom) on the yield curve between 2004 and 2008. We show that macroeconomic surprises that lead agents to revise their ination forecasts also prompt them to expect future movements in the Selic rate in a manner that is consistent with the Ination Targeting regime. Nonetheless, if the Copom believes that the market has either over or under reacted to a particular piece of information, it may express its own view regarding the economic outlook by surprising the market with a di¤erent than expected change in the Selic rate. We also \u85nd that the longer end of the yield curve tends to steepen after a more aggressive than expected interest rate cut, and that international capital ows are the most important drivers of the long-term rates (a possible explanation for the Brazilian version of the interest rate conundrum)