Dynamics of Monetary Policy Response to External Shocks and Its Impact on the Exchange Rate in Iraq: An Econometric Analysis Using the ARDL Model

Abstract

This study aims to analyze the dynamics of monetary policy response to external shocks in Iraq and to examine its impact on the parallel market exchange rate, using quarterly data for the period (2017–2025) and applying the ARDL model to analyze both short- and long-run relationships. The results reveal the existence of a long-run cointegration relationship between the exchange rate and foreign reserves, money supply, oil prices, and public expenditure. The error correction term further confirms a stable long-run equilibrium among the variables. In the long run, foreign reserves have a negative and significant effect on the exchange rate, while money supply and public expenditure exert a positive and significant impact. In contrast, oil prices do not show a direct significant effect, indicating that their influence is transmitted through indirect channels, thereby confirming the existence of a long-run equilibrium relationship among the study variables.