Interrelations Among Inflation and

other Macroeconomic Variables in

the Gambia
Economic Management and Planning
Unit, MOFEA, The Gambia
•

Inflation and Other Variable 1

 Contents of Presentation

1. Purpose and Data Base

2. Methodology
3. Annual Trends
4. Monthly Trends
5. Major Conclusions
6. Policy Briefs

Inflation and Other Variable 2

 1.1 Purpose
• To examine the interrelations among
inflation and the major monetary, fiscal
and real variables for the Gambian
economy.
• Inflation is measured by the rate of change
of the Consumer Price Index (CPI) and that
of the GDP deflator (GDPDF).
• Other macro variables- GDP, M2, EXP,
REV, TBOUT, Budget Deficit, Bank
Credits, Deposit rates, TB Yield,
Exchange rate

Inflation and Other Variable 3

 1.2 Data Base

• Two sets of data are considered for our

econometric analysis:
• (1) Annual Time series data for 12 years
from 1998 to 2009.
• (2) Monthly Time Series data for 33
months from January 2007 to September
2009.
• However, GDP figures are not available
for the monthly series.

Inflation and Other Variable 4

 2.1 Methodology
• For both annual and monthly time series data,
linear and log-linear regression equations are
fitted with the help of OLS method.
• For both linear and log-linear equations, two sets
of regression equations are fitted.
• In one set, CPI is regressed on other variables.
• In the other set, the inflation rate is regressed on
discount rate, deposit rate, yields, depreciation
and growth rates of M2, TB, REV, EXP.
• Data sets and regression results are presented in
the Annex Tables 1 to 22 in the paper.

Inflation and Other Variable 5

 2.2 Overview of Results

• Both the linear and log-linear regression

equations indicate almost similar results
for the annual time series data.
• They also show similar results for the
monthly time series data.
• But, there are some differences of results
between the annual and monthly series
data.

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 3.1 Annual Time Series
(Indices: Base 1998=100)

Year
1998
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3.2 Annual Time Series Data

900
Inflation and Other Variable 8
3.3 Correlation Matrix for Annual
Data

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3.4 Annual Growth Rates (%)

Year
1999
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3.5 Trends of Growth Rates
(%)

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3.6 Correlation Matrix for Growth
Rates

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4.1 Indices of Monthly Trends
(Base January 2007 = 100)

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4.2 Correlation Matrix for Monthly
Data

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4.3 Descriptive Statistics
for Monthly Trends

Variab
Gambia
Inflation
Macroeconomic
and Other Variable
Forecast 15
4.4 Correlation Matrix for Monthly
Data

I
Gambia
Inflation
Macroeconomic
and Other Variable
Forecast 16
 5.1 General Conclusions-1
• Absolute level of Consumer Price Index
(CPI) is positively and significantly
correlated with money supply.
• But, the inflation rate (i.e. the annual rate
of change of CPI) has no significant
relations with the growth rate of money
supply.
• Inflation rate has significant positive
correlations with CBG policy rate, TB
yields, rate of depreciation of Dalasi in
terms of US dollar and the growth rate of
government revenues.
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 5.2 General Conclusions-2
• Inflation rate has no significant relations
with the deposit rates, government
deficits as percentage of GDP, and the
growth rates of government expenditure,
government borrowing from the markets
and the total treasury bills outstanding.
• Therefore, the study does not support the
general view that the money supply,
government deficits, government
borrowing and total domestic debt
outstanding affect inflation rate.

Inflation and Other Variable 18

 6.1 Policy Briefs

• Econometric relations indicate that the

CPI inflation, overall GDP inflation, treasury
bills yields, and the deposit rates are
unduly affected by the high discount rate
announced by the Monetary Policy
Committee (CPC).
• We need to adopt more scientific
methodology for determination of the
Central Bank rediscount rate (i.e. the
policy rate).

Inflation and Other Variable 19

 6.2 Suggested Methodology
• Expected annual inflation rate = 5 percent
• Average nominal deposit rate = Inflation Rate
+ Real rate of 2% = 7 percent
• Reasonable transactions costs of banks
= 3 percent of assets or liabilities
• Normal profit rate = 2% of assets or liabilities
• Average annual cost of collection of funds by
banks = 7% + 3% + 2% = 12 percent
• Reasonable yield for no-risk treasury bills with
maturity of one year or more = 12 percent
• CBG Rediscount (Policy) Rate = 12 percent +
CBG transactions cost of 2 percent = 14%.

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 Thank you
Have a Good Day

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