Impacts of the Monetary Policy Committee decisions on the foreign exchange rate in Brazil

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. Two new daily measures of interest rate surprises are proposed using market and survey data. The results indicate a significant effect of MPC's decisions on FX returns. In particular, the surprise variable based on 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 is not significant to explain FX returns in recent years, under a single-digit interest rate regime. Robustness exercises—using GARCH models or including FX market official intervention series as additional controls—corroborate the previous findings.