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Eugen Tereanu
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.
Eugen Tereanu

Section II , The Gambia likely faces a higher opportunity cost of holding reserves due to the high cost of its domestic debt. Inasmuch as domestic investment returns relate to government debt yields plus a risk premium, the average treasury yield in The Gambia can be used to compute a lower bound for the opportunity cost of holding reserves. Specifically, doubling the opportunity cost parameter to 7 percent is broadly in line with the average real interest rate differential between The Gambia and the United States since 2005. Given the reduced incentive to hold reserves