Exchange Rate Theories in Rentier Economies and Their Applicability to the Libyan Economy: A Critical Review Article
DOI:
https://doi.org/10.65405/7jgcmg66Keywords:
Exchange rate theories; rentier economy; Libya; Dutch Disease; commodity currency; managed exchange rate; fiscal dominance; monetary model, BEER & FEER ; Libyan dinar; oil.Abstract
This paper reviews theoretical frameworks of exchange rate behavior and evaluates their applicability to rentier economies, with particular emphasis on Libya, as an economy highly dependent on oil exports. Eleven frameworks are examined, categorized into three main axes: traditional and advanced exchange rate theories, rentier economy and resource theories, and institutional approaches and economic policy. The evaluation considers each framework's underlying assumptions and their alignment with the structural and institutional characteristics of the Libyan economy. A systematic critical literature review methodology is applied, utilizing a structural-institutional relevance criterion that incorporates the nature of the exchange rate regime, sources of foreign currency, the influence of fiscal policy on monetary policy, the presence of a parallel market, and institutional and political stability. The analysis reveals that certain traditional theories have limited explanatory power in the Libyan context, primarily because Libya's institutional and structural environment differs from these theories' foundational assumptions. In contrast, institutional approaches, particularly rentier state theory, fiscal dominance theory, and the political economy of rent, exhibit significant relevance in explaining the Libyan case. However, none of these theories provides a comprehensive explanation independently, supporting the adoption of a hybrid conceptual framework rooted in the institutional dimension while integrating elements from other frameworks to address structural, monetary, and external factors.
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