The aim of this paper is to determine the effect of government fiscal deficits on the exchange rate in the Gambia using quarterly dataset from first quarter of 1990 to second quarter of 2008. A five variable VAR model of exchange rate, Treasury bill rate, output (GDP), consumer price index (CPI), and budget deficits is employed. Using the Johansen Cointegration framework, it was found that there exists a long run relationship among these variables. The Granger causality test asserts that there exists a bi- directional causality between the budget deficits and the exchange rate. Using the...