The Impact of the Nominal Exchange Rate on the Real Exchange Rate in the Libyan Economy

Mohamed Ali Salem Al-Jaridi1, Abdelsalam Masoud Rahouma2

Department of Economics, Faculty of Economics, Ajilat, University of Zawiya, Libya1

Department of Statistics and Econometrics, Faculty of Economics and Political Science, University of Tripoli, Libya2

ABSTRACT:

 This study investigates the impact of the nominal exchange rate on the real exchange rate in the Libyan economy over the period 1990–2023. The analysis incorporates key macroeconomic variables, including trade openness, oil prices, and inflation, within an autoregressive distributed lag (ARDL) framework to capture both short- and long-run dynamics.Unit root tests indicate that all variables are integrated of order one, I(1), while the ARDL bounds test confirms the existence of a long-run equilibrium relationship. The results reveal that the nominal exchange rate has a positive and statistically significant effect on the real exchange rate in both the short and long run, suggesting that currency depreciation leads to real exchange rate deterioration due to inflationary pass-through effects. Trade openness also exerts a positive and significant influence, reflecting the structural dependence on imports. In contrast, oil prices show no significant direct effect. The error correction model indicates a relatively fast adjustment toward equilibrium, with approximately 71% of deviations corrected within one period. Diagnostic tests confirm the robustness and stability of the model. The findings highlight the importance of exchange rate management and inflation control in enhancing macroeconomic stability.

Keywords: Real Exchange Rate , Nominal Exchange Rate , ARDL Model , Inflation  , Oil Prices  Trade Openness ,  Libyan Economy