An Empirical Investigation of the Effects of Financial Liberalization on the Economic Growth of Libya: A Case Study

Given the significance of financial liberalization and the key role of financial development in the economic growth, this paper sets to investigate the impact of financial services liberalization on the Libyan economy from 1978 to 2011. In order to ascertain and to quantify this impact, the study uses unit root test, Johansen Co-integration test and the Vector Error Correction Model (ECM). The results obtained show that there is a negative relationship between financial liberalization in Libya and economic growth during this period, which goes against Mckininon (1973) and Shaw (1973) hypothesis which have reported positive results regarding the impacts of financial liberalization on economic growth. As for the relationship between labour force and economic growth within of financial liberalization in this study, the result of our finding shows on a positive relation in the case of Libya (which supports the economic theory which has reported a positive relationship between labour and economic growth). However, our findings show that trade openness has not had any impact on economic growth in the short term. The results of the forecasting test show that the quality of the estimated regression model is very satisfactory.