Weather Shocks in The Gambia: Macroeconomic Effects and Households Vulnerability

Abstract Climate change is increasing the frequency of weather shocks, which poses a significant challenge for agriculture-dependent economies such as those of sub-Saharan African countries. In this study, we present an innovative framework that combines empirical and theoretical procedures to investigate the propagation mechanism of weather shocks in The Gambia. We first document the propagation mechanism of a weather shock using a Structural Vector Auto-regressive (SVAR) model on the Gambia data. We construct and estimate a Dynamic Stochastic General Equilibrium (DSGE) model to elucidate this mechanism. This model is enhanced to encapsulate the weather-dependent agricultural sector, the heterogeneity of households in terms of access to financial markets and the inflow of remittances. Our findings reveal that weather shocks in The Gambia (i) account for approximately 10% of GDP and agricultural output in the short run, (ii) significantly contribute to long-term consumption volatility,(iii) critically increase the volatility of Ricardian households’ consumption and (iv) stimulate an increase in the direct inflow of remittances to vulnerable households.