Abstract
<p class="MsoNormal" style="text-align: justify; margin: 0in 35.75pt 0pt 37.4pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Applying the well-known GARCH/ARCH (Engle, 1982, 2001) model, we find that real output in Costa Rica is positively affected by real M2 money, the expected inflation rate, and the U.S. output and negatively influenced by the depreciation of the colon. Consistent with the Barro-Ricardo (1989) hypothesis, deficit spending does not affect real output. Therefore, the Costa Rican government may need to pursue a balanced budget and maintain the stability of the colon because the costs of currency depreciation outweigh the benefits. <span style="mso-spacerun: yes;">&nbsp;</span></span></span></p>
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