The impact of some monetary policy variables on attracting foreign direct investment in Iraq for the period 2004-2023

Abstract

This study aims to elucidate the components of monetary policy and foreign direct investment (FDI) and to underscore the impact of monetary policy on attracting FDI in Iraq over the study period. To achieve this objective, annual time-series data covering the period 2004–2023 were employed. The study applied the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests to examine the stationarity of the variables, in addition to employing the Bounds Testing approach (Bound Test) to identify the presence of a cointegrating relationship between FDI and the monetary policy variables — namely, broad money supply (M2), inflation rate, official exchange rate, and interest rate. The short-run and long-run dynamics were estimated using the Autoregressive Distributed Lag (ARDL) model. The empirical results revealed a negative and statistically significant short-run relationship between broad money supply and FDI, whereas a positive and statistically significant relationship was observed in the long run. Moreover, the findings indicated a negative but statistically insignificant short-run relationship between the official exchange rate and FDI, while in the long run, the relationship turned negative and statistically significant. Furthermore, the analysis demonstrated a negative and statistically significant relationship between inflation and FDI in both the short and long run. In contrast, the relationship between the interest rate and FDI appeared negative but statistically insignificant across both time horizons. The results confirmed the existence of cointegration and a long-run equilibrium relationship between FDI (as the dependent variable) and the monetary policy indicators.The study concludes by recommending that economic policymakers adopt strategies aimed at enhancing FDI inflows through maintaining price stability, controlling inflation, and ensuring exchange rate stability away from excessive volatility. In addition, it highlights the necessity of reforming the banking system and improving the efficiency and competitiveness of interest rates to foster a more attractive environment for foreign direct investment.