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The incidence of reserve requirements in Brazil: Do bank stockholders share the burden?

There is consensus in the economic literature that reserve requirements are a tax levied upon financial intermediation, yet the incidence of the tax remains controversial. In this paper, we test whether changes in reserve requirements in Brazil impact the stock returns of the Brazilian financial system distinctly from the rest of the economy. We show that Brazilian bank stock returns may have been affected by changes in reserve requirements on both time deposits and transaction accounts, which implies that the tax burden of required reserves has not been fully passed through to banks’ borrowers or clients. Stock returns of non-financial firms may also have been affected by changes in reserve requirements, suggesting that in some cases, reserve requirements on time deposits and transaction accounts served as a non-neutral instrument of monetary or fiscal policy in Brazil.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): XI (2008)
Issue (Month): (May)
Pages: 61-90

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Handle: RePEc:cem:jaecon:v:11:y:2008:n:1:p:61-90
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  1. Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
  2. Baltensperger, Ernst, 1982. "Reserve Requirements and Economic Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 205-15, May.
  3. Fabozzi, Frank J. & Thurston, Thom B., 1986. "State Taxes and Reserve Requirements as Major Determinants of Yield Spreads among Money Market Instruments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 427-436, December.
  4. Scott E. Hein & Jonathan D. Stewart, 2002. "Reserve requirements: A modern perspective," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 41-52.
  5. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
  6. Osborne, Dale K. & Zaher, Tarek S., 1992. "Reserve requirements, bank share prices, and the uniqueeness of bank loans," Journal of Banking & Finance, Elsevier, vol. 16(4), pages 799-812, August.
  7. Cosimano, Thomas F. & McDonald, Bill, 1998. "What's different among banks?," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 57-70, February.
  8. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  9. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  10. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
  11. Bental, Benjamin & Eden, Benjamin, 2002. "Reserve requirements and output fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1597-1620, November.
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