Changes in the Brazilian yield curve responses to monetary shocks

Advisor: Carlos Viana de Carvalho

Empirical evidence from reduced form VAR estimates shows that there has been a change in the way that the Brazilian yield curve reacts to a monetary policy shock. To better understand the sources of this change we estimated a linearized DSGE model with a term structure of interest rates over two sample periods to see what parameters of the economy might have caused the change. The linearization method is augmented with a volatility adjustment term in order to generate a positive term spread and a risk-adjusted steady state. We discuss the empirical evidence, compare the solution method with other traditional methods and estimate a model with Epstein-Zin preferences using Bayesian methods. We find that our structural model is capable of capturing this change in behavior, and it is caused mainly by changes in parameters of the interest rate rule and interest rate shocks.