The Role of Government Spending in Promoting Libyan Financial Stability: An Econometric Analysis Using the ARDL Model for the Period 1993 to 2023

Abstract

This study employs the Autoregressive Distributed Lag (ARDL) model and the Error Correction Mechanism (ECM) to examine the short- and long-run relationship between government expenditure and financial stability in Libya over the period 1993–2023. The bound test confirms a long-run equilibrium (F-statistic = 6.42 > Upper Bound 5% = 4.85). Using the selected ARDL(2,1) model, the long-run coefficient of government expenditure is 0.73 (significant at 1%), and the short-run coefficient is 0.41 (significant at 5%). The error correction coefficient ECM(-1) = –0.55 is statistically significant, indicating that deviations from equilibrium are corrected by 55% in each period. These results support fiscal policy reforms, particularly the restructuring of public spending toward productive sectors and enhancing coordination between fiscal and monetary policies. The study concludes with actionable recommendations relevant to Libya’s economic context, offering guidance for policymakers and international development stakeholders.