Econometric model for the Libyan economy : 1970-2006

The implicit aim in this kind of study, especially within developing countries, is to provide a tool that allows an economic decision maker to stand on solid ground and to reduce the problems that arise from the stochastic decisions in such countries. One of most effective tools, in this regard, is the econometric model.Accordingly, in pursuit of achieving this aim, this study constructed a small econometric model for the Libyan economy with a view to assessing the existing and alternative economic policies, specifically fiscal and monetary policies, and then aimed to explore their transmission mechanisms and interaction. Therefore, the model is designed to capture the main characteristics of the economy whilst also exploiting the developments in economic theory and econometric analytical tools. The model consists of six blocks, namely, the aggregate demand, the aggregate supply, the balance of payments, the government, the monetary, and the price. The model has been estimated utilizing time-series data spanning the period from 1970 to 2006. Also, the single equation of the model was estimated by using the ‘Gets’ technique which involves the formulation of a ‘general’ unrestricted model ‘GUM’ that is congruent with the data and the application of a ‘testing down’ process, eliminating variables with coefficients that are not statistically significant leading to a simpler ‘specific’ congruent model that encompasses rival models. This step achieves the first objective of the use of econometric models which is the structural analysis.In addition, this study has carried out the remaining two objectives of econometric studies, namely forecasting and policy analysis. Accordingly, in order to fulfil this aim the model of the study has been solved as a whole, simultaneously using the dynamic simulation technique. It is evident from the dynamic simulation of the model that the model’s performance is, generally, quite satisfactory, whereby the model tracking behaviour clarified a good fit, and this is realized for most of the equations which performed much better than would be expected for a model of a developing country such as Libya.The evaluation of the forecast accuracy of the model using the (MAPE), (RMSPE), and the Theil inequality coefficient (U) asserted the relatively good performance of the model.The simulations’ experiments in this study have evaluated the potential influences of the two major policy options, fiscal policy and monetary policy. As expected, with regard to the analysis of the monetary policy scenario and compared with the fiscal policy scenario, it can be concluded that monetary policy is less efficient compared to fiscal policy, according to this proposed model for the analysis of economic policy in Libya.In addition, also, it is evident that fiscal policy should play a key role in the management of the Libyan economy and the role of monetary policy should be confined to supporting fiscal policy