When the economy is shocked by devaluation, prices do not rise proportionately. Output increases and the distribution of income can actually improve. These results support Sandinista policy of raising wages along with devaluation, a policy widely criticised as counterproductive

The authors construct a model for Mexico in which class conflict over the distribution of the surplus is the principal determinant of the terms of trade. The model consists of seven social classes and eight productive sectors. The paper investigates various policy scenarios under the theories of...