Macroeconomic impacts of exchange rate misalignments in Libya

Ben-Naser, Abdulhamid

Abstract

This study attempted to shed light on misalignments of real exchange rate in the Libyan economy. This is the first study that focuses on estimating the real exchange rate misalignments for the Libyan currency in my knowledge. The study took into account the most important characteristics of the Libyan economy, which depends almost entirely on public oil sector. This sector plays a significant role in the stability of inflation and value of the national currency. Oil shocks have had an evident impacts on monetary stability due to the fragility of the economy. This study found obvious proof of great and severe misalignments, in the form of over or undervaluation states of local currency which usually lasted for a long time. The large misalignment in the real exchange rate continuously for a long time in this way misses the opportunity for an appropriate economic climate in order to encourage foreign investment and non-oil exports. Libya as an oil exporting economy tried for many years to improve the external trade sector to increase the non-oil exports, reduce imports and substituting some of them by local products. The main target of that is to maintain the foreign exchange resources for investment projects. Oil crisis had made the economy to suffer from sharp structural imbalances, which has been difficult to overcome.

The study also focused on the impacts of misalignments on economic performance. The main outcome of this part is that, increase in overvaluation states cause negative effects on economic indicators such as a decrease in non-oil GDP and non-oil exports, an increase black market premium and inflation rates. It is also noticed that, overvaluation episodes accompany with unstable economic situations, particularly in recent years. It was also noted that the overvaluation had negative linkage with endogenous variables in the traditional Keynesian model such as real private consumption, real total taxes, real interest rate, real imports, and real gross domestic income. On the other hand, undervaluation states brought many positive aspects to the economy.

The New Keynesian DSGE model, with so-called three-equation model for three associations between output gap, inflation and interest rate rule, was estimated with the same time series data as for the evaluation of macro impacts. This model discovered that inflation rates relies on GDP gap in the Libyan economy by the slope of the New Keynesian Philips Curve. It also showed that, significant positive association between current inflation deviations to expected future inflation deviations. The parameter for the degree to which the central bank responds to movements in inflation was at a very low level compared with the literature. The DSGE model also predicts expected inflation to fall after the recovery in oil production that started at the end of 2017. This in turn will lower the real exchange rate appreciation and then will shrink overvaluation episodes moving the actual real exchange rate towards the equilibrium path gradually.

Main contribution of thesis lies in measurement of misalignments for Libya, assessing the impacts of such misalignments on the Libyan economy and proposing a simple new Keynesian DSGE model to be suitable for analysing inflation and misalignment in Libya.

Citation

Ben-Naser, A. Macroeconomic impacts of exchange rate misalignments in Libya. (Thesis). University of Hull. https://hull-repository.worktribe.com/output/4221981

• Thesis Type: Thesis
• Deposit Date: Nov 15, 2019
• Publicly Available Date: Feb 23, 2023
• Keywords: Economics
• Public URL: https://hull-repository.worktribe.com/output/4221981
• Additional Information: Department of Economics, The University of Hull
• Award Date: Aug 1, 2019