Dynamics of Monetary Base in Libya: A Time Series Econometric Analysis Using Monthly Data (2004–2026)

Abstract

This study investigates the short‑run and long‑run dynamics of the monetary base (MB) in Libya using monthly data from January 2004 to April 2026 (268 observations). Unlike previous descriptive studies, we adopt an econometric approach focusing on changes in MB to avoid the accounting identity fallacy. The model examines how changes in net foreign assets (ΔNFA) and changes in net domestic assets (ΔNDA, in levels to avoid negative log values) influence monthly MB variations, controlling for structural breaks (2011, 2014). Unit root tests (ADF) confirm that lnMB and lnNFA are I(1); NDA is treated in levels as a variable that becomes stationary after differencing. The Johansen cointegration test indicates a long‑run equilibrium relationship between lnMB and lnNFA, allowing a Vector Error Correction Model (VECM). Results show ΔNFA has a positive and significant short‑run impact on ΔMB, while ΔNDA is insignificant. The error correction term (−0.231) is negative and significant, confirming a long‑run equilibrium where NFA negatively affects MB (sterilization). Dummy variables for 2011 and 2014 are significant, capturing political shocks. This is among the first time‑series econometric studies on monetary base dynamics in a fragile, oil‑dependent economy.