Government Financial Dominance and the Independence of the Central Bank of Libya: A Study of Asymmetric Effects

Abstract

is study aims to analyse and measure an impact the government financial dominance on an independence of the Central Bank of Libya by analysing the annual data for the period (1990-2022), where the non-linear autoregressive distributed lag (NARDL) technique was used, through which the effects of symmetric and asymmetric relationships of financial dominance variables (public spending - public debt) on the independence of the Central Bank of Libya can be verified. Results of the study showed that an increase/decrease in the impact (positive and negative) of public spending will lead to an increase/rise in the money supply, which means a decrease in the index of central bank independence. An increase/decrease in the impact (positive and negative) of public debt will result in an increase/rise in the money supply, which indicates a decrease in the index of central bank independence. As well as relationships between the indicators of government financial dominance and the independence of the Central Bank of Libya were asymmetric in the long run, and symmetric in the short run. The results of the study agreed with the Sargent and Wallace hypothesis and with King's interpretation, as the results showed that financial dominance limits the independence of the Central Bank of Libya, and both the increase in public spending and public debt had a negative impact on the role of monetary policy in achieving its goals in the long run. The study also recommended the necessity of coordination between fiscal and monetary policies and emphasizing on the independence of the Central Bank.