An Analysis of the Impact of the Components of the Monetary Base from the Liabilities Side on the Exchange Rate Gap for the Period (2004-2024)

Abstract

The exchange rate gap represents the difference between the official rate of the local currency, set by the monetary authorities, and its rate in the parallel or unofficial market. This gap often crystallizes in economies with fixed or managed exchange rates, and Iraq has been one of the countries that has applied such a system for a long time. Therefore, the current study attempts to investigate the exchange rate gap in Iraq and the extent to which it is affected by the monetary base, expressed through its implications related to the liabilities section of the central bank's budget. The study used a VAR model to measure the effect of the independent variables, namely the currency in circulation and bank reserves, on the dependent variable, the exchange rate gap. The study concluded that there is a significant effect of the implications of the monetary basis on the exchange rate gap. The study recommended the need to work hard to reduce the exchange rate gap in Iraq to enhance confidence in the local currency.