Effects of External Shocks on Output and Real Exchange Rate in Costa Rica

This paper studies the main effects of external commercial and financial shocks on output and real exchange rate in Costa Rica. Commercial shocks are approximated by foreign demand and international prices indicators (GDP of USA and the terms of trade of Costa Rica) and financial shocks by the interest rate of USA. VAR analysis applied to quarterly data of the period 1982-1995 allows one, although approximately, to know the magnitude, direction and duration of shocks. The evidence suggests that a greater expansion of world economic activity tends to generate a permanent and wide positive effect on output and a small and transitory appreciation of the colon, the local currency (five quarters after the event). An improvement of terms of trade tends to raise, in a limited way and for a short time (two quarters), the GDP and to appreciate domestic currency, although low in magnitude, but for an important period (ten quarters). A raise of foreign interest rates has a negative effect on output, and surprisingly it tends to appreciate permanently and deeply the colon