Dynamic Relationship between Inflation and Economic Growth in the Gambia: A VECM Analysis

Abstract

This study examines the dynamic relationship between inflation and economic growth in The Gambia for the period 2000-2024 using a Vector Error Correction Model (VECM). Annual data on GDP growth, inflation, and the Real Effective Exchange Rate (REER) are analyzed through unit-root tests, cointegration analysis, and VECM estimation to capture both short-run dynamics and long-run equilibrium relationships. The results reveal a statistically significant and economically meaningful negative long-run effect of inflation on GDP growth, while the REER does not significantly influence long-term growth. Short-run effects of inflation on growth are weak and statistically significant, and adjustment toward long-run equilibrium is slow. Graphical evidence further suggests nonlinear dynamics, where episodes of elevated inflation coincide with growth downturns. These findings underscore the importance of maintaining price stability to support sustainable economic growth in The Gambia. The paper concludes with policy recommendations, including the adoption of a formal inflation-targeting framework, strengthened monetary-fiscal coordination, and structural reforms to enhance revenue mobilization and reduce import dependence.