The relationship between oil revenues and the real exchange rate in Libya

econometrics study for the Period 1980 – 2018

Abstract

The exchange rate in Libya plays a fundamental role in the monetary policy through its impact on foreign trade، given that the Libyan economy depends on revenues from oil exports، which represent about 95% of the total exports. It also relies largely on imports، which makes the Libyan economy vulnerable to external shocks. This study dealt with measuring the effect of the changes in oil revenues on the real exchange rate in Libya، where the standard method used to estimate the relationship between oil revenues and the real exchange rate in Libya during the study period was the Engle and Granger methodology of co-integration. The study arrived at a number of results، the most important of which are: The time series of both study variables، oil revenues and the exchange rate، are stable at their first differences. There is also a co-integration between the variables of the study، which means that both oil revenues and the real exchange rate move with each other over time، in addition to the existence of a positive relationship between the variables. In other words، if an increase of one unit occurred in oil revenues، it would lead to an increase of (0.14) in the real exchange rate in the short term. This means that if a shock occurs in oil revenues، the imbalances will be corrected at an adjustment rate of (49%) within a year، at a significant level of 5%، in order to return the system back to a state of equilibrium.