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Estimating the demand for money in Libya: An application of the Lagrange multiplier structural break unit root test and the ARDL cointegration approach

Author

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  • Ali, Issa

    (University of Benghazi, Benghazi, Libya)

Abstract

This paper examines the demand for money in Libya using annual data for the period 1970 – 2010 by applying the Autoregressive Distributed Lag (ARDL) cointegration approach and allowing for endogenous structural breaks in cointegration equation. The results based on the bounds testing procedure confirm that a stable, long-run relationship exists between demand for money and its fundamental determinants; namely, real income, inflation rate and nominal exchange rate. The empirical results indicate that there is a unique cointegrated and stable long-run relationship among real money demand (M1), real income, inflation rate, and nominal exchange rate. The real income elasticity coefficient was found positive while the inflation rate elasticity and nominal exchange rate were negative. This shows that depreciation of domestic currency decreases the demand for money. The results also reveal that after incorporating the CUSUM and CUSUMSQ tests, M1 money demand function is stable between 1982 and 2010.

Suggested Citation

  • Ali, Issa, 2017. "Estimating the demand for money in Libya: An application of the Lagrange multiplier structural break unit root test and the ARDL cointegration approach," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 46, pages 126-138.
    • Handle: RePEc:ris:apltrx:0321
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    More about this item

    Keywords

    money demand; ARDL; stability; Libya;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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