The effectiveness of monetary policy in containing inflation in light of digital transformation: A comparative analytical study between Libya, Algeria, and the UAE during the period (2020-2025)
DOI:
https://doi.org/10.61952/jlabw.v2i1.481Keywords:
Digital Transformation, Monetary Policy Effectiveness, Inflation Dynamics, System GMM, CointegrationAbstract
This study provides a comprehensive empirical assessment of the structural role played by digitalization-driven transformation as a mediator in the effectiveness of monetary policy and inflation dynamics across a set of diverse economies. The study covers the period between 2020 and 2024 for the United Arab Emirates, Algeria, and Libya—countries that differ in their levels of digital maturity and institutional stability.
Based on official statistics, the Consumer Price Index (CPI) ranges for each country were as follows: UAE (-2.08% to 5.29%), Algeria (2.42% to 9.32%), and Libya (1.45% to 4.51%). Panel unit root tests indicate that all series are integrated of order one, I(1). However, Pedroni and Kao cointegration tests revealed long-term stable relationships between inflation, monetary aggregates (M2), and a composite Digital Transformation Index (DigIndex).
Using the System Generalized Method of Moments (System GMM) for dynamic panel data estimation, the results indicated that the lagged CPI coefficient was 0.472 (p < .001), the interest rate effect was -0.218 (p = .003), and the change in monetary aggregates (ΔM2) effect was 0.193 (p = .002). The Digital Transformation Index (DigIndex) also contributed a significant negative impact of -0.087 (p = .034) in reducing inflation in these countries. Furthermore, the interaction term coefficient between (DigIndex × ΔInterest Rate) showed a notable amplification of policy effectiveness, with a value of -0.134 (p = .005).
Impulse response analysis revealed that a 1% monetary policy shock led to a peak inflation reduction of -0.31% in the UAE within 2-4 months; -0.14% in Algeria within 5-9 months; and -0.06% in Libya within 9-14 months.
In conclusion, these findings demonstrate that digital transformation acts as a structural mediator, forming an additional "digital monetary transmission channel" that enhances and accelerates the effectiveness of traditional monetary tools. The study offers practical insights for policymakers in emerging and transitional economies to leverage digital infrastructure in achieving macroeconomic stability
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