Determinants of Inflation in the Iraqi Economy: Time Series Analysis Using the VECM Model (2004-2023)
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Abstract
This study aims to examine the determinants of inflation in the Iraqi economy over the period 2004–2023 using a Vector Error Correction Model (VECM) to identify both the long-run equilibrium relationships and the short-run dynamics between the inflation rate and broad money supply (M2), real gross domestic product, the nominal exchange rate, and international oil prices. The analysis relies on annual official data obtained from the World Bank, the Central Bank of Iraq, and the International Monetary Fund, and the estimations are carried out using the EViews software package. The results of the unit-root tests indicate that all variables are integrated of order one, I(1), while the Johansen cointegration test confirms the existence of two cointegrating vectors, suggesting the presence of a stable long-run equilibrium relationship between inflation and its key determinants. The estimated long-run coefficients show that the exchange rate is the most influential determinant of inflation in Iraq, followed by monetary expansion, whereas real output growth exerts a mitigating effect on inflationary pressures. International oil prices are found to affect inflation mainly through indirect fiscal and liquidity channels. Moreover, the error-correction term reveals that approximately 53 per cent of any deviation from the long-run equilibrium is corrected within one year, indicating a relatively rapid speed of adjustment. The study concludes that achieving price stability in Iraq requires prioritizing exchange-rate stability, enforcing strict monetary discipline, and strengthening supply-side policies that support productive growth, alongside maintaining fiscal restraint during periods of oil-price booms.
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