This paper has two main objectives. First, it analyzes the key short-term sources of inflation in Libya, and reviews trends depicting these relationships. Second, based on this analysis, it develops a model that serves to forecast short-term inflation. The developed model offers policymakers an instrument to forecast inflation, and to determine if double-digit inflation will prevail in coming months as has occurred in similar periods when oil revenues have sharply fallen.The test for long run relationship of bounds testing approach shows that there is a cointegrating relationship between the consumer price index and parallel exchange rate and the money supply. The findings presents a ground for policy makers to forecast inflation within the short-term framework.

This paper investigates the impact of the volatility of the underlying macroeconomic fundamentals on

exchange rate volatility utilizing the bounds testing approach to cointegration. The results show that, in the

long run the volatility of the money supply is the sole determinant, whereas in the short run overshooting

is found.