This paper applies intertemporal models of precautionary saving to compute an optimal level of international reserves for The Gambia. The analysis focuses on current account shocks specific to a low-income economy with a significant import component and complements a more standard, rule-of-thumb reserve adequacy assessment. The results suggest a central range from 4.5 months to 7 months of imports, which is broadly aligned with the recent actual coverage. Notwithstanding parameter sensitivity, the simulations allow for more informed policy decisions that balance flexibility with a prudent approach to reserve use.
motive in the face of shocks to the terms of trade, foreign demand for exports, and foreign transfers (official aid and remittances). 7
We apply the models of Barnichon (2009) and Valencia (2010) to complement a traditional analysis of reserve adequacy using rule-of-thumb thresholds for reserve coverage in months of imports. Our results suggest that international reserves holdingsinTheGambia are broadly aligned with macroeconomic risks, with import coverage indicators generally varying between 4.5 months and 7 months of imports. The robustness analysis