Will Libya return to its 70s style inflationPosted: November 10, 2013
In the last few months I have been delving into the rabbit hole that is the monetary policy blogesphere. I don’t regret it, I feel my knowledge and confidence has enhanced by a few economists. It was like a new set of eye glasses that put the world into focus. One of the most interesting things I read was on NGDP targeting and the revisiting by some bloggers (mostly Market Monetarists) of Friedman’s interest rate fallacy and Abenomics. With this I tried to see if Libya’s current disfunction is linked to poor economic policy. Of course as a monetary policy fanatic I focused on that first. The central bank of Libya is anything but accurate. I find that their website is difficult to navigate and all my data on Libya comes either from IMF or the World Bank. So, there is extreme difficulty in getting data. But from the data one can see that Libya is not Japan or the US in the sense that its position doesn’t mirror too little money but rather (most likely) too much.
Using the Market Monetarists 5% growth rate for nominal growth one can see that Libya after the war will be above the potential rate of growth since 2007.
Why I chose 2007 is simple, it was a year of moderate growth that was the basis for the function of Libya before external conflicts interrupted. If I set the rate of growth from 2000 or even 2005 I don’t think that captures a realistic growth path. Currency devaluation occurred between 2000-2005 that increased exports dramatically, as well much of the economic sanctions were removed, thus for a period the growth rate and state of the economy were irregular in the sense that that would be unlikely to occur gain. Thus basing the potential growth on 2007 is realistic but I will constantly review it, even the 5% might be too low. Based on historical performance I think an 8 or even 10% growth rate in NGDP would be healthy but Libyan macro data is highly inaccurate.
Anyways, you can see the gap between potential NGDP and actual (plus expected). If this is correct Libya could be out preforming and the monetary state might be expansionary. I believe that the graph is understating the projections for Libya. With a large part of the oil industry dormant and much of the international trade stalled I think that once the political situation settles I won’t be surprised if by 2015 they hit 150 Billion in US Dollars. Just based off of previous historical evidence of their trade one can see that in 2003 when the sanctions were lifted trade boomed. So, really the projections are understated and this is why I am proposing that the central bank possible look at a tighter policy in a year or so. Recreating the inflation of the 70s and 80s would be detrimental for Libya. The central bank would benefit from pursuing a nominal GDP target and if not, since tools are extremely limited in Libya, than even an M2 target would be suffice but only for a limited period. If the financial sector grows so does the complication of targeting quantity.
PS. There is much more to the Libyan economy than just monetary policy. But while I struggle with my Arabic while navigating the central bank’s website expect more of the wonderful world of Libyan macro in the coming days.
Libya could be an ultimate experiment in monetary policy for Monetarists or Market Monetarists in general. If such a policy occurs then possibly economists can see the effectiveness of monetary policy over fiscal policy. However, if anyone from the Libyan central bank reads this I stress that rules matter, toss that discretion right into the Mediterranean.