Money supply, inflation and economic growth in Libya

Abstract

The aim of this study is to examine the relationship between money supply, inflation and economic growth in Libya. Vector auto-regression model, Johansen co-integration test and Granger causality were used in the analysis for the sample period of 1960-2016. The results indicate that all the variables are co-integrated in long-term. Furthermore, the increase in economic growth by 1% decreases inflation by 1.55%. While the growth in money supply by 1% will increase the price level by 1.15%. According to the results of the causality test, there is no causality direction in short-run among the variables except unidirectional causality among economic growth and money supply running from RGDP to RM2 at the to 5% significance level. In addition, the response of inflation on the economic growth is negative all throughout the ten periods. Also, the same applies to money supply and economic growth. Besides, economic growth has an early and positive impact on money supply.