The Effect of Exchange Rate on Inflation: Iraq as a Case Study

This study examines the effect of exchange rate fluctuations on inflation in Iraq from 2005 to 2023. Using an ARDL model, the results demonstrate a significant short-term relationship between exchange rate movements and inflation, indicating that changes in the exchange rate exert immediate pressure on price levels. The Bound Test confirms the presence of a long-term equilibrium relationship, supported by the Fully Modified Least Squares (FMOLS) method, which shows a modest yet positive long-term effect of exchange rates on inflation. Diagnostic tests, confirm the robustness of the model and the absence of serial correlation and heteroscedasticity. The findings highlight that while exchange rate volatility is a key driver of inflation, its long-term effects are moderated by structural economic factors such as Iraq's heavy reliance on oil revenues and external financial policies. These results underscore the importance of maintaining exchange rate stability and implementing effective monetary policies to mitigate inflationary pressures and support economic stability in Iraq.