Abstract
This study examines the relationship between inflation and growth in The Gambia using annual data over the period 1961–2019. The main contribution of this study relative to the existing literature on The Gambia is that it specifies a quadratic model to estimate a specific inflation threshold. This study is relevant in The Gambia, given the economy’s unofficial inflation target of 5%. The analysis also shows that it is preferable to analyse the effect of inflation on the level of gross domestic product (GDP) per capita rather than the growth rate. In order to estimate and evaluate the impact of inflation on the level of GDP per capita, this dissertation employs three estimation methods: ordinary least squares, fully-modified ordinary least squares estimator and two-stage least squares (2SLS) procedures. The estimation results of the 2SLS procedure are used to derive policy implications, since this procedure effectively controls for endogeneity bias relative to the other estimation techniques. The main findings show that inflation up until a precisely estimated threshold value of 15% has a positive and statistically significant effect on GDP per capita. After the threshold, the effect turns negative and statistically significant. From these results, the Central Bank of The Gambia’s unofficial inflation target of 5% may be too conservative. In addition to the inflation rate, the econometric estimates identify a competitive real exchange rate and greater trade openness as key determinants of living standards in The Gambia.
Keywords: inflation, growth, per capita GDP, threshold inflation, The Gambia