A unique monetary reaction rule: the case of Lebanon

Abstract

Purpose: This study describes a unique monetary reaction rule adopted by the Lebanese Central Bank. Unlike international standards in most countries, the Lebanese monetary rule maintains the supply and demand of money in equilibrium and neutralises money shocks. The paper determines whether money reactions are significant and if they are symmetric in magnitude. Design/methodology/approach: This study uses multivariate panel and system least-squares regressions to describe the Lebanese monetary rule with appropriate econometric controls, including a lagged foreign exchange rate in Lebanese funds to account for leaning against the wind policy. Findings: The monthly sample period from 1989 to 2018, which excludes recent and exceptional civil unrest, indicate that the two money supply and demand functions are stable for Lebanon. Originality: Separating monetary shocks into their distinct demand and supply constituents is original and productive in appraising central bank behaviour, and could explain many empirical puzzles in the literature. © 2022 Inderscience Enterprises Ltd.