Analysis of the Determinants of the Gap Between the Official and Parallel Exchange Rates in Libya and Its Economic Effects: An Econometric Study Using the ARDL Model (1990–2025)

Abstract

This study analyzes the determinants of the gap between the official and parallel exchange rates in Libya and examines its impact on inflation. Using annual data for the study period, the Autoregressive Distributed Lag (ARDL) model was employed to estimate both the short-run and long-run relationships among the variables. The analysis includes oil revenues, money supply, inflation, government expenditure, and political and security stability as the main determinants of the exchange rate gap. The findings reveal a long-run equilibrium relationship among the variables. Oil revenues were found to reduce the exchange rate gap, while money supply growth and inflation widened it. Political and security stability contributed to narrowing the gap and improving foreign exchange market stability. The results also indicate that a wider exchange rate gap increases inflationary pressures in the Libyan economy. The study recommends strengthening monetary and fiscal discipline, improving foreign exchange management, and enhancing political and security stability to reduce the exchange rate gap and support macroeconomic stability.