Inflationary Imbalance Between the Exchange Rate and Government Financial Flows: An Analytical Study from Iraq

Abstract

Study aims to analysis of the reality of the inflation rates (IRs) in Iraqi economy (IE), Analyzing the impact of the spending policy on the money supply and the rate of inflation in the IE, and Analyzing the impact of the local exchange rate (ER) on the IRs in the IE. The research found that the foreign currency sale window has contributed to achieve monetary stability in the economy, but that was at the expense of depleting reserves of the CB. This puts monetary policy (MP), in front of two options: either to continue the policy of targeting inflation, and this is imaged in the depletion of foreign reserves, or to reduce foreign currency sales in the sale window in such a way that makes it consistent with the volume of oil revenues (OR), and this exposes the economy to waves of depreciation in the ER and the best example of that is what happened when the application of the sales ceiling is announced in the 2015 budget. The ER also had a major role in influencing inflation rates (IRs). Their stability contributed to the decline in IRs in the country, increased the ability of the currency sale window in sterilizing the monetary supply and left a positive impact on IRs. Accordingly, the research recommends the need to work to restrict the expansion of government financial flows, which is the main reason for the growth in the cash supply and accounts for inflationary pressures in the economy. This requires the Central Bank (CB) to intercede significantly in the foreign currency sale window to stabilize the Dinar ER.