There is consensus in the economic literature that reserve requirement is a tax levied upon financial intermediation. The incidence of the tax, however, is still a controversial issue. In this paper, we test whether the impact of changes in reserve requirements in the stock returns of the Brazilian financial system is different from the impact in stock returns of the rest of the economy. We find evidence that bank stock returns are not affected by changes in reserve requirements on demand deposits. In contrast, stock returns of non-financial institutions are substantially affected by such changes, suggesting that reserve requirements are a non-neutral instrument of monetary policy in Brazil. Reserve requirements on time deposits, however, are a tax paid by banks’ stockholders.
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