The impact of exchange rate fluctuations on the trade balance in the Libyan economy: an econometric study using the quantitative regression approach (QQR) during the period (1990–2024)
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Libyan Economy, Quantile-on-Quantile Regression, Quantile Causality, Exchange Rate, Trade Balance, J-Curve
Abstract
This research aims to measure the impact of exchange rate fluctuations on the Libyan trade balance across all its probability distributions during the period (1990–2024), and to test the validity of the J-curve hypothesis within a non-linear and asymmetric framework. Cointegration tests using the ARDL Bounds Test and Johansen methodologies revealed the absence of a long-term linear relationship between the two variables. This strengthens the methodological justification for adopting the quantitative-on-quantitative regression (QQR) approach, which does not require linear integration as a prerequisite. The approach was applied with the Local Kernel Weighting function and the Bovinger criterion (h=0.05). The BDS test confirmed the presence of a non-linear structure in the data, and the quantitative correlation matrix (9×9) revealed a clear non-linear structure in which the positive correlation peaked at (+0.72) in the middle ranges, compared to a negative correlation of (-0.26) in the lower ranges. The model results showed a pattern consistent with the J-curve hypothesis within a non-linear distribution framework, as it recorded a negative effect coefficient of (-13,950.72) during periods of extreme deficit (Q5), before turning towards (+52,111.49) at the upper levels of the distribution (Q95). The causality test across quantities, supported by 500 Bootstrap iterations, confirmed the existence of a significant predictive power for the exchange rate at the distributional edges (p<0.05), while it proved neutral in the middle ranges. A structural break was detected at 2013 by the Bai & Perron test. The study recommends adopting a gradual flexible float (5% annually for three years) to reduce the immediate deficit by approximately 50%, while diversifying the production structure to ensure sustainable trade stability.
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