Accordingly، money supply (MS2) and the exchange rate of the Libyan dinar are the main determinants of the rate of inflation in the Libyan economy in the short and long term

	Accordingly، money supply (MS2) and the exchange rate of the Libyan dinar are the main determinants of the rate of inflation in the Libyan economy in the short and long term
journal of Economics And Administrative Sciences/ University of baghdad
Article 1, Volume 16, Issue 60, 2010, Pages 158-193
Abstract
Economists believe that the rate of domestic inflation is mainly determined by several factors including money supply and exchange rate، where the money supply is clearly related and linked to monetary base (HB). They also think that the impact of exchange rate on money supply can be explained particularly through the mechanism of the movements in the balance of payments and foreign assets. The aim of this study is to find out the impact of the fluctuations in money supply and exchange rate on the rate of domestic inflation in the Libyan economy. The study tries to contribute to the literature by examining the effects of money supply and exchange rate on the rate of domestic inflation in the Libyan economy during the period of 1990-2008. The study divided into four sections، following the introduction، section two gives a brief review of the relationship between the inflation rate، money supply and exchange rate based on the economic theory. It also، attempts to address the issue of stabilized function of the demand for money and the main determinants of the exchange rate based on thoughts of variety of economic schools (e.g. classical and new-classical schools). Section three gives a descriptive analysis of relationship between the inflation rate، money supply and exchange rate in the Libyan economy. Further، the money supply (in its wide (MS2) and narrow (MS1) concept) and exchange rate are determined and explained in this chapter in order to give the theoretical background for the following chapter. Sophisticated economic models and econometric techniques have been utilized in Section four in order to achieve the main objectives of this study. These models and techniques include Error correction model (ECM) and Granger Causality model. The Error Correction Model is developed and tested in this chapter in order to analyze the long and short run relationship among the rate of inflation، money supply and exchange rate in the Libyan economy during the period 1990-2008. Furthermore، a two-way causality between the variables of the exchange rate and inflation (CPI)، has been tested using the methodology of Granger causality test in this chapter in order to determine the causation or the direction between these variables. The main results of this study are illustrated in Section four. These results indicate that a two-way causality between exchange rate and inflation represented by consumer price index (CPI) occurred and found to be statistically significant. The result of Error correction model (ECM) shows that there is a long and short relationship among the variables under investigation. Furthermore، The granger causality test indicates that the presence of a causal relationship with one direction from the money supply in its broad definition (MS2) to consumer price index (CPI) and the exchange rate of the Libyan dinar against the U.S. dollar (E). Accordingly، money supply (MS2) and the exchange rate of the Libyan dinar are the main determinants of the rate of inflation in the Libyan economy in the short and long term
Keywords
Accordingly; Money Supply

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