A DSGE model for Fiscal Policy Analysis in The Gambia

The study investigates the effect of fiscal and monetary policies on domestic debt dynamics and provides fiscal rules useful to control domestic debt dynamics and maintain fiscal consolidation. Using a New-Keynesian model with the fiscal sector, this study analyses the contribution of government spending on aggregate demand measured by fiscal multipliers and the impact of tax adjustment on domestic debt dynamics. The findings indicate that while consumption and capital income tax have a stabilizing effect on domestic debt, labor income tax produces a weakly positive impact on domestic debt growth due to a higher fraction of Non-Ricardian households in the economy. The study provides a quantitative framework through a Bayesian estimation of steady-state tax rates as a benchmark to tax policy, aiming at mitigating fiscal distress without an adverse impact on output growth.