Monetary policy tools and excess money supply in an interest-free economy: The case of Libyan monetary policy.

Abstract

This research paper addresses the problem of identifying a set of monetary policy instruments in an economy devoid of interest rates, as well as the issue of the existence or absence of an excess money supply. The study adopts a descriptive-analytical approach regarding monetary policy instruments, while a quantitative analytical methodology is employed to estimate the existence or absence of excess money supply.

The study concludes that the absence of an interest rate in the Libyan economy has no significant impact, as it has never been effective in any previous period—evidenced by the long-standing stability of the rediscount rate. Furthermore, the study identifies approximately fifteen tools or instruments that can be utilized to influence monetary policy. The findings also reveal the presence of a substantial excess in the money supply, estimated at about 74%, and emphasize the need to eliminate this surplus to move forward under a sound monetary policy framework that adopts the identified instruments—a mix of traditional tools known in conventional banking systems and innovative instruments consistent with Islamic banking principles.