A Theoretical Analysis of Money Supply for Libya

Abstract

This study aims to conduct an applied study on the possibility and ability of the traditional money supply function to explain the developments that occurred in the money supply in the Libyan economy during the period after 2013. The study also aims to search for an alternative formulation of the money supply function that includes the main factors affecting the money supply. in Libya. In describing, characterizing and formulating the money supply function for the Libyan case, the study relied on three basic assumptions and concluded that the money supply function in Libya differs from the money supply function referred to in the economic literature. Perhaps the two main reasons for that difference are: the law of abolishing the interest rate, which led to the abolition of... The role of commercial banks in the money creation process, and the second reason is the crisis, The results of the graphical and statistical analysis showed that the change in the money supply resulted from the change in the monetary base and that there is no clear role for commercial banks in the process of creating money. The relationship between the Central Bank’s decisions to expand the money supply is linked to financial policies and not to monetary policies. In other words, the strength of the relationship between the expansion of the money supply and government debt determines the independence and dependency of monetary policy, that is, the more, The stronger relationship between the two variables was that the role of monetary policy was subordinate to fiscal policy, as these results supported the hypotheses of theoretical analysis on which the study relied in formulating the money supply function in Libya. In conclusion, the study recommended the necessity of conducting an applied study through which a standard model is estimated that includes the money supply function in Libya in its new form and measures the strength of the relationship between the variable government debt from the Central Bank and the latter’s decisions to expand the money supply.