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Applying the IS-MP-IA model and the Taylor rule, this study finds that a lowerexpected inflation rate, real appreciation, a lower federal funds rate, and moreworld output would help increase the Croatian output. The insignificance ofgovernment deficit spending suggests that the Ricardian-equivalence hypothesismay be applicable to Croatia. The conventional wisdom to pursue currencydevaluation to stimulate the economy may not work for Croatia.JEL classifications: E52, E62, F41