Dr Azar is Professor, Faculty of Business Administration and Economics, Haigazian University. This note is inspired by a study by Dr Ali Bolbol and Ms Sara Hadchiti, both from BLOMINVEST Bank, entitled Lebanese Budget Deficit Financing in H1 2020: A Critical Look (Lebanon Brief, September 2020, Week 3) . I am grateful for comments with Dr. Ali Bolbol.
The purpose of this note is to explain the recent depreciation of the Lebanese pound against the US dollar after October 2019, the date of the start of the civil uprising which led to a dollar and a banking crisis. The posed question is the following: Can fundamentals explain the manifest misfortune of the pound? The fundamentals selected stem from two theoretical underpinnings: the presence of a parsimonious currency demand function, and the notion that excess demand for the US dollar in the alternative spot market is due to an excess supply of the currency in circulation. Although the modeling is simple it is not simplistic, as we shall see below.
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Forecasting the foreign exchange rate of the US dollar against the Lebanese pound