The Effects of Asymmetric Shocks in Oil Prices on the Performance of the Libyan Economy

This essay examines the presence of asymmetry in the response of the Libyan economy to fluctuations in oil prices, subsequent to the discovery of oil in the country. Three Vector Autoregressive (VAR) models are illustrated and estimated along with a multivariate rolling VAR approach. All of the examined sectors of the economy are found to react asymmetrically to shocks in oil prices over the 1962-2012 period. The magnitude of the adverse effect of the negative oil shocks on the manufacturing and agriculture sector appears to outweigh the positive effect of the positive oil shocks. The services sector, on the other hand, is able to overcome the shocks of the oil prices, due to absence of external competition. In addition, the results of the Multivariate rolling VAR highlight the existence of structural changes in the relationship between the sectors of the Libyan economy and oil prices. The essay promotes implementing reform to the fiscal policy to de-link the real sector from fluctuations in oil prices. It also advises on enabling the financial sector in order for it to contribute in the diversification process of the economy.