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This study attempts to answer two main questions. First, how does the composition of public expenditure affect the economic growth rate of macroeconomic variables such as the real output of the non-oil sector, employment, and total imports in Libya? Second, what is the appropriate fiscal and/or monetary policy to be used by the Libyan government to finance public expenditure, especially after the collapse in the oil price in the 1990s? To achieve these ends, a small macro-econometric model of the Libyan economy is constructed for the period 1962-1992 and estimated using the Johansen approach. The model reflects the Libyan institutional environment relevant to the observation period. The model links public finances to the monetary sector, the real sector, the role of foreign trade and the balance of payments, and the labour market. The model is utilised to (1) examine the impact of government expenditure on the growth of the macro-economic variables mentioned above; (2) examine the impact of different ways of funding these expenditures; (3) examine long-run equilibrium relationships estimated through the cointegration approach. The short-run dynamics was modelled via error correction models. Evaluation of the model was through standard single equation diagnostics, model simulation, and forecasting. Policy simulation was used to evaluate macro-economic policy options open to the government of Libya. As a result this study provides considerable knowledge about the structure of the Libyan economy through the period 1962-1992, and about the impact of government expenditure and its finance instrument (fiscal and/or monetary means) on growth. |
