Measurement and Analysis of Some Factors Affecting the Exchange Rate and Their Role in the Exchange Rate Gap of the Iraqi Dinar for the Period 2004–2023

Abstract

This research aims to identify and determine the most significant economic factors explaining the gap between the official and parallel exchange rates of the Iraqi Dinar from 2004 to 2023. The study utilized annual data for several influential economic variables, including the central bank's currency auction window (both cash sales and transfers), broad money supply (M2), foreign reserves, and an index of political and security instability. The Autoregressive Distributed Lag (ARDL) model was employed to measure the long-run and short-run relationships between the independent variables and the exchange rate gap. The research findings revealed the following: The central bank's sales in the form of transfers had a significant negative impact on the exchange rate gap in the short run, and this negative effect persisted in the long run. Conversely, the central bank's cash sales had a positive relationship with the gap in the short run; however, this effect turned negative in the long run, reflecting a structural imbalance characterized by increased dollar smuggling and weak market supervision. Foreign reserves were negatively related to the exchange rate gap in the short run, but the relationship turned positive in the long run. The political instability variable had a clear positive impact on the gap between the two rates in the short run, indicating that political turmoil increases uncertainty, leading to exchange market disruption and a widening gap.