We use the CGE analysis to provide an assessment of the way an oil exporting LDC is affected by a positive exogenous shock due to the rise in the price of oil. Our main purpose is to examine how the effects differ under fixed and flexible exchange rate regimes; it is desirable, from a short-run policy point of view, if a situation could be identified in which the benefits accrued from the higher oil price lead to a rise in households' and government's consumption as well as to a considerably higher level of investment.
We carry out the study for Libya which, in the light of its recent reforms, presents itself as an interesting case. We construct a social accounting matrix for the country for the year 2000 and use it to calibrate and simulate a CGE model that is sufficiently detailed to capture the main aspects of the economy. Our simulations are carried out on the assumption that market forces play the equilibrating role and our results suggest that on the whole a flexible exchange rate allows for a better economic performance, and the constancy of the saving ratio is crucial for generating the desirable situation mentioned above.