The Impact of the Official and Parallel Exchange Rates on Inflation in Libya: An Econometric Study Using an ARDL Model on Monthly Data for the Period 2015–2022

Abstract

This study examines how Libya’s official and parallel exchange rates affected inflation from 2015 to 2022 using monthly data and an autoregressive distributed lag (ARDL) framework. Given Libya’s heavy reliance on imports, exchange-rate movements directly influence domestic prices by changing the cost of imported goods and inputs, making this topic highly relevant for policy. Inflation, measured by changes in the consumer price index, is the dependent variable. The main explanatory variables are the official exchange rate and the parallel-market rate. Where available, the model also controls for money supply, oil prices, and import prices. The analysis first checks the stationarity of the time series with unit-root tests, then uses bounds testing to assess whether a long-run equilibrium relationship exists among the variables. After that, the study estimates short- and long-run effects and uses an error-correction model to measure the speed of adjustment back to equilibrium following shocks. The working hypothesis is that depreciation of the Libyan dinar—whether in the official or parallel market—increases inflation by raising import costs. The parallel-market rate is expected to exert a stronger effect because it is widely used in commercial transactions and shapes expectations and local prices. The study aims to clarify the exchange rate–inflation link, compare the impacts of official versus parallel rates, and estimate how quickly inflation returns to its equilibrium path after disturbances. The results should inform policy efforts to unify the foreign-exchange market, narrow the official–parallel rate gap, strengthen market oversight, and improve liquidity management and monetary policy—steps that can help reduce inflationary pressures and support economic stability in Libya.