Estimating the determinants, dynamics and structural breaks in the real exchange rate of Libya
This paper examines the determinants of real exchange rate (RER) of Libya utilising annual data for the period 1970-2007 by applying the Auto Regressive Distributed Lag (ARDL) cointegration method. Our empirical evidence shows that there is a long-run equilibrium relation between the RER and its fonda mental determinants. The results indicate that the RER strongly appreciates with respect to tenns of trade but strongly depreciates with government expenditure which is not comistent with the traditional Mundell-Fleming effict offocal policy( In addition, RER depreciates with interest rate differential. appreciates with foreign assets, and appreciates with openness of the economy. However, the impact of technology and productivity improvement on the RER is not significant. The speed of adjustment towards equilibrium was found to be high with short-run disequilibrium cO/Tecting by nearly 76 per cent per annum. Both the structural brea!? variables afe found to be positive, but one o/tbem (D2) is statistically imignificant indicating the non-linearity in the RER fimction. The results add new imights to the literatl,,·e on the determinants of the RER in Libya.
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