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Hitchhiker’s Guide to Inflation in Libya

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  • Serhan Cevik
  • Katerina Teksoz

Abstract

This paper presents an empirical investigation of inflation dynamics in Libya over the period 1964–2010, using cointegration and error correction models. While inflation inertia is found to be a key determinant of consumer price inflation, the econometric results indicate that government spending, money supply growth, global inflation, and exchange rate pass-through play central roles in the inflation process. These findings are broadly consistent with the experience of other countries that are natural resource dependent. We also find evidence that the imposition and subsequent removal of international sanctions on Libya had a noteworthy impact on consumer price inflation. Collectively, our estimates indicate that the deviations from an equilibrium path initiate significant adjustments in inflation dynamics, and that closer coordination between monetary and fiscal policies would improve the balance between economic growth and price stability.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/78.

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Length: 28
Date of creation: 27 Mar 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/78

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Related research

Keywords: Inflation; Libya; Monetary policy; Fiscal policy; Economic models; Inflation; money supply; exchange rate pass-through; international sanctions;

References

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  1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  2. Jonathan B. Hill, 2004. "Efficient Tests of Long-Run Causation in Trivariate VAR Processes with a Rolling Window Study of the Money-Income Relationship," Working Papers 0413, Florida International University, Department of Economics.
  3. Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers 98, Bank for International Settlements.
  4. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  6. Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper 2004-14, Federal Reserve Bank of Atlanta.
  7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  10. Alexander Kyei & Nir Klein, 2009. "Understanding Inflation Inertia in Angola," IMF Working Papers 09/98, International Monetary Fund.
  11. Carlo Cottarelli, 1998. "The Nonmonetary Determinants of Inflation - A Panel Data Study," IMF Working Papers 98/23, International Monetary Fund.
  12. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
  13. Habib, Maurizio Michael & Stráský, Jan, 2008. "Oil exporters: in search of an external anchor," Working Paper Series 0958, European Central Bank.
  14. De Grauwe, Paul & Polan, Magdalena, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," CEPR Discussion Papers 2841, C.E.P.R. Discussion Papers.
  15. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  16. Carlos Caceres & Serhan Cevik & Ricardo Fenochietto & Borja Gracia, 2013. "The Day After Tomorrow: Designing an Optimal Fiscal Strategy for Libya," IMF Working Papers 13/79, International Monetary Fund.
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