Inflation Dynamics in the Gambia

Abstract

Gambia inflation rate has picked-up in recent years. This paper investigates the inflation dynamics in The Gambia using monthly time series data for the period 2005-2014. Several econometrics models are applied including single equation model, Structural Vector Autoregression (SVAR) model and Vector Error Correction Model (VECM). The empirical results confirm the existence of stable relation between money supply and inflation, and exchange rate and inflation. We found that the depreciation of the exchange rate has a much more immediate impact on inflation. In addition, the exchange rate pass-through for GMD/ US dollar exchange rate is stronger. The study shows that current inflation is affected significantly by past inflation. The results also reveal that inflation in neighboring country, Senegal, significantly influences inflation in the Gambia in all specifications. Furthermore, the empirical findings reveal that the artificial fixing of the exchange rate or fear of float in recent years further exert inflation pressure. In the short-run external shocks of money supply, exchange rate and prices in Senegal account for significant variations of inflation. However, in the medium term domestic demand and the exchange rate pass-through for GMD/US dollar exchange rate account for larger variations in inflation.