The Central Bank of Iraq’s Management of the Exchange Rate as a Tool to Control Inflation: An Administrative Approach to Analyzing the Impact of Monetary Policy and Government Spending on Exchange Rate Stability (2004–2023)

Abstract

This study investigates the Central Bank of Iraq’s (CBI) strategy of using exchange rate pegging as a key monetary policy tool to control inflation from 2004 to 2023. Utilizing annual time series data and applying the Autoregressive Distributed Lag (ARDL) model alongside Granger causality testing, the research empirically examines both the long-run and short-run relationships between the official exchange rate, inflation, and government expenditure. The findings confirm a statistically significant long-term relationship, with the exchange rate acting as an anchor for inflation expectations. Moreover, results reveal that the causal direction primarily runs from the exchange rate to inflation, validating the effectiveness of the peg in stabilizing price levels—particularly in the absence of robust alternative monetary tools. Government expenditure is also found to have a notable influence, occasionally offsetting the positive effects of exchange rate stability. The study concludes that successful inflation control in Iraq is contingent upon greater coordination between monetary and fiscal policies and increased institutional credibility. These findings provide practical insights for Iraqi policymakers and contribute to the literature on monetary policy in rent-dependent, transitional economies.