The Role of Foreign Exchange Reserves in Exchange Rate Stability in Iraq for the Period (2004–2023)

Abstract

Exchange rate is considered one of the most critical economic indicators due to its fundamental role in determining the strength and resilience of a country’s economy. Similarly, foreign exchange reserves serve as a financial safety valve and a key tool to mitigate economic fluctuations, particularly through their significant role in stabilizing the exchange rate and addressing imbalances in currency demand. An increase in these reserves typically contributes to greater economic stability. Iraq has been seeking to enhance the accumulation and optimal use of these reserves with the aim of promoting economic diversification and reducing reliance on oil exports as the primary source of national income, especially in light of the volatility of oil prices. Foreign reserves are closely linked with various macroeconomic indicators, including inflation, exchange rate, money supply, GDP, and imports. Accordingly, this study aims to investigate and measure the impact of foreign exchange reserves on the exchange rate in Iraq during the period (2004–2023). The study adopted the Nonlinear Autoregressive Distributed Lag (NARDL) model to examine both short- and long-term effects. The results reveal a statistically significant inverse relationship between foreign exchange reserves and the exchange rate of the Iraqi dinar in the parallel market