Abstract
This paper examines the presence of asymmetry in the response of the Libyan economy to fluctuations in oil prices, subsequent to discovery of oil in the country. Three Vector Autoregressive (VAR) models are illustrated and estimated along with a multivariate rolling VAR approach. All sectors are found to react asymmetrically to shocks in oil prices over the 1962-2012 period. The magnitude of the adverse effect of the negative oil shocks on the manufacturing and agriculture sector appears to outweigh the positive effect of the positive oil shocks. The services sector, on the other hand, is able to overcome the shocks of the oil prices, due to absence of external competition. In addition, the results of the Multivariate rolling VAR highlight the existence of structural changes in the relationship between sectors of the Libyan economy and oil prices. The essay recommends implementing fiscal policy reform to de-link the real sector from fluctuations in oil prices. It also advises promoting the development of the financial sector in order for it to contribute in the diversification of the economy.
Highlights
The effects of the volatility and the massive windfalls of natural resources on developing countries have been widely discussed in the literature, and cross-country analysis showed that those mentioned economies were homogenous in various categories (Arezki and Markus, 2011)
The main results obtained from this paper suggest that, due to the lack of a proper institutional framework to de-link the economy from fluctuations in oil prices, the Libyan economy was asymmetrically affected by shocks in oil prices
The results show that while the tradable sector was adversely affected by the negative oil shocks, it did not gain as much from the positive oil shocks
Summary
The effects of the volatility and the massive windfalls of natural resources on developing countries have been widely discussed in the literature, and cross-country analysis showed that those mentioned economies were homogenous in various categories (Arezki and Markus, 2011). Arezki and Van der Pleog (2007) found that there is a significant negative direct effect of natural resources on the growth of income per capita. This conclusion was reached earlier by Gylfason and Zoega (2006). This issue will be investigated with more detail once we construct our model. This can help us in detecting the syndromes of the “Dutch Disease.” that period witnessed a large increase in the non-hydrocarbon fiscal deficit, which is a strong indicator of increasing oil-dependence
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