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The author wishes to thank Regis Barnichon and Fabian Valencia for generously sharing the simulation code and comments. In addition, insightful comments were provided by David Dunn, Camelia Minoiu, Robert Powell, Robert Price, Jens Reinke and staff at the Central Bank of The Gambia.
For a more comprehensive discussion of motives, including transaction demand and reserve accumulation as a result of active exchange rate intervention, see the discussion in Drummond et al. (2009).
The WAMZ was established in 2000 and includes The Gambia, Ghana, Guinea, Nigeria, and Sierra Leone. A reserve coverage of 3 months of imports of goods and services is a convergence criteria for membership.
The Exchange Market Pressure Index is a weighted average index of nominal exchange rate and reserve changes with an increase (decrease) indicating upward (downward) pressure on the currency (Cardarelli, et al., 2009).
The scope of the 2009 general SDR allocation of US$ 250 billion was to provide all IMF members with significant, one time unconditional financial resources to cope with liquidity constraints resulting from the global economic crisis.
The latest financial arrangement between The Gambia and the IMF is in the form of an Extended Credit Facility (ECF, formerly PRGF) set to expire in February 2011.
Barnichon (2009) calibrates the opportunity cost as the differential between the average annual real return on capital in LICs estimated by Caselli and Feyrer (2007) at 7 percent and the average real rate of return of 3.5 percent on the 10-year U.S. treasury bonds over 1967–2007. As discussed in the text, we also experiment with a calibration that considers real returns on The Gambia domestic debt.