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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. JEL classification codes: E5, E6Key words: tax incidence, reserve requirements, event studies * Fabia A. de Carvalho (corresponing author): Central Bank of Brazil, DIPEC/GEESP, SBS Quadra 3, Bloco B, Edifício Sede do Banco Central do Brasil, 20º andar, 70074-900, Brasília, DF, Brazil, fabia.carvalho@bcb.gov.br. The views expressed here are those of the authors and do not necessarily reflect those of the Central Bank of Brazil. We would like to thank Anderson Caputo and Eduardo Fernandes for important comments and suggestions on earlier versions of this paper. It is not to be inferred that they share the views expressed here. Moreover, they are exempted from any errors that may still remain. 70% 80% 90% 100% J u n . 9 4 J u n . 9 6 J u n . 9 8 J u n . 0 0 J u n . 0 2 J u n . 0 4 J u n . 0 6 Time deposits 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% J u n . 9 4 J u n . 9 6 J u n . 9 8 J u n . 0 0 J u n . 0 2 J u n . 0 4 J u n . 0 6 Savings deposits 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% J u n . 9 4 J u n . 9 6 J u n . 9 8 J u n . 0 0 J u n . 0 2 J u n . 0 4 J u n . 0 6 Mutual funds

Inflation Expectations in Latin America I n economies with important price indexation mechanisms, one of the greatest challenges of a disinflationary monetary policy is to make price setters form expectations (and thus set prices) on the basis of forward-looking variables instead of looking back into the past. Under a credible inflationtargeting regime, looking forward means believing in the inflation targets announced by the central bank.Some Latin American central banks that explicitly target inflation have reacted strongly to deviations of inflation expectations from announced targets. Fraga, Goldfajn, and Minella argue that the strong reaction of the Central Bank of Brazil to private inflation forecasts suggests that "the Central Bank conducts monetary policy on a forward-looking basis and responds to inflationary pressures." 1 In Mexico, Torres García also finds evidence that monetary policy responds to forward-looking variables, such as inflation expectations, rather than to backward-looking ones. 2 The literature on optimal monetary policy has traditionally been built on the assumption that agents' expectations are rational, which implies that price setters perfectly know the structure of the model governing the economy and all the parameters of that model. 3 However, this assumption is not innocuous to optimal monetary policy. Orphanides and Williams demonstrate that when expectations are updated every period from a finite sample regression, which seems to be what real-life econometricians do, the central bank should react

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