Terms of trade fluctuations and stabilization of producer prices by compensatory taxation

Abstract

A small general equilibrium model is presented which highlights the role of the real exchange rate in the South in determining the terms of trade between the South and the North. The dynamics of the model may generate terms of trade instability for some values of the parameters of the system. Compensatory taxation of export earnings by a stabilization fund in the South is shown to increase the likelihood of instability.