Investigating the factors affecting the inflation rate with an emphasis on exchange rate fluctuations in the Iraqi economy

Mahmoud Neda, Ghazi; Hashemi Dizaj, Abdulrahim

Investigating the factors affecting the inflation rate with an emphasis on exchange rate fluctuations in the Iraqi economy

Document Type : Origional Article

Authors

Ghazi Mahmoud Neda ¹

Abdulrahim Hashemi dizaj ²

¹ Department of Economics, Faculty of Social Sciences, University of Mohaghegh Ardabili, Ardabil, Iran

² Department of Economics, Faculty of Social Sciences,University OFMohaghegh Ardabili , Ardabil, Iran

Abstract

Background and Aim: According to economic literature, excessive inflation (more than the sustainable level of inflation) destroys purchasing power, distorts economic decision-making, and leads to uncertainty in economic factors, while deflation (less than the sustainable level of inflation) can lead to a decrease in spending (consumption) and investment, and potentially stop economic growth. The aim of this research is to use the results obtained from examining the factors affecting the inflation rate in order to increase the efficiency of monetary policy and control inflation.
Methodology: In this study, time series econometric techniques (unit root and stationary concepts, variability models, and autoregression with distributed lags (ARDL) model) have been used. First, the stationary variables are examined by performing classical and nonlinear unit root tests with respect to structural failure. Next, the long-term relationship between the research variables is examined by the bounds test, and then long-term and short-term elasticities are extracted. Exchange rate fluctuations are also extracted by conditional heteroskedasticity models (GARCH) and then these variables will be entered as new explanatory variables in the autoregression with distributed lags (ARDL) model.
Findings and Conclusion: According to the results obtained, the two variables, the exchange rate volatility index and the degree of trade openness, are the most important determinants of the inflation rate in Iraq in the long run. Meanwhile, in the short run, the exchange rate volatility index does not affect the inflation rate. Exchange rate fluctuations can affect trade and investment between affect the international economy, because uncertainty in the exchange rate can stop foreign investment and affect export competitiveness, and also increase import inflation. The increase in the degree of trade openness causes global commodity inflation to quickly affect the Iraqi economy and increase the consumption costs of Iraqi citizens. Also, according to the results, the error correction coefficient is negative and equal to -0/36 Therefore, in each year, 0/36 of the imbalance in the inflation rate in one period is adjusted in the next period. It can be said that the adjustment towards equilibrium is carried out slowly, which depends on the macroeconomic environment of Iraq.

Keywords

exchange rate

inflation rate

exchange rate fluctuations

Iraqi economy

Subjects

Urban & Regional Economic

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