Methodology of cointegration and error correction model in estimating the relationship between economic growth and money supply in the Libyan economy from the period (2003-2018)

Abstract

  This study aimed to identify the impact of money supply on economic growth during the period (2003-2018). The main findings indicated cointegration between the variables, meaning that money supply and economic growth move together over time. The error correction test results showed a negative and significant error limit, fulfilling the model's fundamental requirement for portraying short-run dynamics. This means that 88% of short-run errors can be corrected within 2.3 years (two years) to return to the initial equilibrium. The study concluded that there is a long-run equilibrium relationship between money supply and growth, and a bidirectional causal relationship between them. Consequently, the relationship was estimated using two slower periods as follows: GDP = -9907.051 + 0.015164 GDP (-1) – 0.148712 GDP (-2) + 3.392476 MS (-1) + 5.355033 MS (-2) - 0.877239 UI