Asymmetric Effects of Money Supply Fluctuations on Macroeconomic Stability Indicators in Libya: A NARDL Approach over the Period 1980–2024

Abstract

This study examines the asymmetric effects of money supply fluctuations on key macroeconomic stability indicators in Libya over the period 1980–2024, employing the Nonlinear Autoregressive Distributed Lag (NARDL) model. Using annual data for broad money supply (M2), the consumer price index (CPI), real gross domestic product (RGDP), government expenditure (GOV), and global oil prices (OILPRICE), the analysis reveals a robust cointegrating relationship among the variables. The results indicate a statistically significant asymmetric effect of liquidity on inflation, with the long-run impact of negative money supply shocks (0.002372) substantially exceeding that of positive shocks (0.000467). Dynamic multiplier analysis further demonstrates that negative liquidity shocks generate larger cumulative inflationary responses over time, with the differential widening progressively from 0.000563 in year one to 0.002198 in the long run, peaking at 5–6 years. By contrast, no statistically significant asymmetric effect is detected for economic growth, although positive liquidity shocks exhibit a short-run growth-stimulating effect that reverses in the long run. The error correction terms for both models (−0.591 for inflation and −0.599 for growth) indicate rapid adjustment towards long-run equilibrium, with approximately 59–60% of any disequilibrium corrected within one year. These findings underscore the distinct nonlinear dynamics characterizing Libya's oil-dependent economy. The study recommends prudent monetary policies that explicitly account for the asymmetric nature of liquidity effects and advocates for institutional reforms to enhance banking sector confidence and policy coordination.