Impacts Of Exchange Rate Fluctuations And Government Debt On Economic Performance For A Latin American Country

Abstract

Applying the autoregressive conditional heteroskedascity (ARCH) model as developed by Professor Robert F. Engle (1982, 2001) and based on a 1970-2002 sample, real GDP was found positively affected by the peso depreciation, the U.S. economy, real M2 money, government spending and the expected inflation rate, and negatively influenced by government debt. The gradual recovery of the U.S. economy is expected to help the Colombian economy. An increase in government spending helps raise real output, but increasing government debt to finance rising budget deficits would reduce national output.