Examination of the Libyan currency crisis : weak fundamentals or a moral hazard problem

Abstract EN

Over the last three decades, many nations and regions around the world have experienced severe currency crises.

Three types of models were used to investigate their main causes.

These models are referred to in literature as the first, the second, and the third-generation models.

The macroeconomic fundamentals have generally been the primary causes of currency crises in the first and the second generation models, whereas the third generation models stress on the important role of moral hazard, balance sheet vulnerabilities and foreign capital flows.

This paper aims to examine which of these three models can best explain the current currency crisis in Libya.

We conclude that the Libyan currency crisis has unique characteristics as it is a combination of weak government policies as in the first-generation models and weak banking system as in the third-generation model.