the region. Table 5 suggests that while tax reform still has a long
way to go, the 2002 -2007 increase in tax/GDP ratio was achieved
in part by raising progressive direct taxes, while reducing
regressive excises and general sales tax. In addition, the selective
export tax used in Br az il an d Argentina is likely progressive, as it
captures part of the ‘windfall profits’ due to rising world prices,
accruing to a sector characterized by high asset and income
concentration.
Monetary policy and inflation targeting
As suggested by the ‘impossible trinity theorem,’ in economies with
an open capital account, such as those of Latin America, the
monetary authorities can count only few tools (accumulation of
reserves and sterilization of the increase in money supply induced
by capital inflows) to control the fall in interest rates and credit
expansion occurring during periods of export bonanzas and
financial exuberance. The only other instrument utilized was the
introduction of capital controls, as done in part from 2002 to 2008
by Argentina, and in 2007 by Colombia (Ocampo 2008). In most
other countries, both LOC and NO-LOC, monetary policy was
therefore either accommodating or neutral, tolerating (with the
major exception of Brazil) lower or even negative real interest rates
and higher inflation rates. Monetary policy also aimed at reducing
the extensive dollarization of the financial system. Argentina
conducted a radical de-dollarization during the crisis of 2002, while
Peru, Bolivia and Uruguay adopted a policy of gradual de-
dollarization. In particular, there was a decline in the floating of
dollar-denominated public-sector bonds in domestic markets.
Finally, there was a general strengthening of Central Bank
independence.
Exchange rate reg ime
With the exception of Brazil and Venezuela, most LOC and
several other countries abandoned the free floating and fixed
pegged regimes adopted during the prior decade, and opted instead
for a competitive exchange rate regime, as in the case of Argentina
(Frenkel and Rapetti, 2008), or employed managed floats aimed at
preventing an appreciation of the real exchange rate. As noted by
Ocampo (2007), consistent with this approach, Central Banks