Estimating The Demand For Money In Libya: An Application Of The Lagrange Multiplier Structural Break Unit Root Test And The Ardl Cointegration Approach

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This paper examines the demand for money in Libya using annual data for the period 1970—2010 by applying the Autoregressive Distributed Lag (ARDL) cointegration approach and allowing for endogenous structural breaks in cointegration equation

The empirical results indicate that there is a unique cointegrated and stable long-run relationship among real money demand M1 , real income, inflation rate, and nominal exchange rate

The real income elasticity coefficient was found positive while the inflation rate elasticity and nominal exchange rate were negative

The results also reveal that after incorporating the CUSUM and CUSUMSQ tests, M1 money demand function is stable between 1982 and 2010.

The results based on the bounds testing procedure confirm that a stable, long-run relationship exists between demand for money and its fundamental determinants namely, real income, inflation rate and nominal exchange rate

This shows that depreciation of domestic currency decreases the demand for money