What is the appropriate Monetary Policy regime for The Gambia?

Abstract

The Gambia, a small open economy, implements a managed floating exchange rate regime. The central bank (CBG) has the mandate to design and implement monetary policy with the primary aim of achieving price and exchange stability in the economy. In spite of interventions by the CBG, the country continues to experience fluctuations in its exchange rate with several instances of major spikes in recent years. This thesis proposes a solution, through a change of policy regime, to control the long time and disturbing depreciation of the domestic currency. In a vector auto regressive framework, the study investigates sources of the exchange rate variability using quarterly data from 1998:Q1 to 2012:Q4. Furthermore, the OCA theory and the pre- conditions of inflation targeting are used to make a choice between a common currency and inflation targeting for the Gambia. The findings from the Johansen test of cointegration suggest that the selected key macroeconomic variables are cointegrated, meaning, they have long run equilibrium. The results of the VECM reveal that error correction mechanism can be achieved in some of the variables. This indicates that there exists the convergence process. In addition, the results from the impulse response analysis put forward that the macroeconomic variables have effect on...