ANALYSIS OF THE RELATION BETWEEN INFLATION AND FOREIGN EXCHANGE RATES FOR THE NORTHERN REGION OF IRAQ

Abstract

The purpose of this study is to examine the relation between the inflation rate, foreign exchange rates of themajor currencies used in the northern region of Iraq (NRI), money supply and gross domestic product (GDP)for the period 2008-2016. It is notable that the region suffers from high inflation rates and there were fluctuations in foreign exchange rates after the fall of the former Iraqi regime in 2003. This is the first article aboutthis subject for NRI using an error correction model and the results indicate that there is a long-run relationbetween variables. The relation between US Dollar and inflation in the region is positive and statistically significant. There is a negative relation between Euro and inflation, which is also statistically significant. NRIimports many goods and services from Turkey, but a surprising result is that the Turkish Lira variable is notstatistically significant. This may be due to the fact that import payments are done with Dollars and not TurkishLiras. There is also a negative long-run relation for the variables GDP and money supply, which are not statistically significant. In the analysis, money supply by the Iraqi Central Bank was used as the money supply variable, but the amount of money supply in the NRI is not proportional to the amount offered by the CentralBank, there is no advanced banking system in the region. The amount of Dinar coming into the region consistsof converting the oil export revenues into Iraqi dinar and supplying these Dinars as payments to the market.Therefore, the NRI money supply will depend on the oil revenues and the Dollar, which makes money supplyvariable statistically insignificant.