Analysis of inflation dynamics in the Libyan economy
DOI:
https://doi.org/10.37375/esj.v2i3.2172Keywords:
inflation, exchange rate, shocks, Libyan economy, variance decompositionsAbstract
The broad aim of this study was to analyse the dynamics of inflation in the Libyan economy during the period of 1966-2012. This aim can be divided into three objectives, which are: testing for long run equilibrium relationship between the inflation used proxy and its determinants utilizing Johansen and Juselius (1990) approach to cointegration, testing for long run and short run causality between the inflation used proxy and its determinants using VECM based Granger causality test, and analyzing inflation response to expected shocks in these variables throughout impulse response functions and variance decompositions approach.
The main findings of the study have supported the existence of the long run equilibrium relationship between the dependent variable and its determinants. In addition, a long run causality relationship from the inflation determinants to the inflation rate has been captured. Furthermore, the shocks analysis has indicated that the response of inflation rate to the shocks in the variable itself and exchange rate was big and positive. However, the response to the shocks in the rest of the independent variables was small and fluctuated between positive and negative sides. Variance decompositions analysis has supported the results that inflation rate and exchange rate were the most important determinant to the fluctuations in this phenomenon.
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