Monetary policy transmission and inflation dynamics in the Gambia: evidence from a structural vector Autoregression approach

ABSTRACT This study examines the transmission of monetary policy in The Gambia using monthly data from 2002 to 2024 within a Structural Vector Autoregression (SVAR) framework. The analysis explores how shocks to the policy rate affect output growth, inflation, unemployment, money supply, and the exchange rate. The optimal lag length of six, selected by the Akaike Information Criterion, ensures stable and well-specified VAR estimates. Impulse response functions indicate that a policy rate increase leads to short-term declines in GDP growth and inflation, alongside a temporary rise in unemployment. Forecast Error Variance Decomposition results reveal that output fluctuations are largely self-driven, whereas inflation responds gradually to monetary shocks. Overall, the findings suggest that monetary policy in The Gambia has short-lived effects, constrained by structural and financial market limitations.