A benchmark study of the impact of monetary policy effectiveness on inflation rates in Libya during the period (1967-2024)

Abstract

This study aims to highlight the effectiveness of monetary policy and its impact on inflation rates by analyzing the standard impact of monetary policy tools, namely money supply, currency in circulation outside banks, and the exchange rate, on inflation rates in the Libyan economy during the period (1967–2024). The study employed an econometric time series analysis of the variables under investigation. A multiple regression model was estimated using the Autoregressive Distributed Lag (ARDL) method. The descriptive analysis revealed a long-term positive relationship between the independent variables and the inflation rate. The econometric analysis showed a statistically significant negative relationship between the exchange rate, the currency in circulation outside banks, and inflation in both the short and long runs. A statistically insignificant positive relationship was found between the money supply and inflation, with a weak effect in the short run, while a statistically significant positive relationship was found in the long run. The study recommends adopting an integrated economic policy framework based on controlling money supply growth, stabilizing the exchange rate, enhancing confidence in the banking system, and diversifying government revenues, along with effective coordination between monetary, fiscal, and trade policies.