The Impact of Financial Depth and Exchange Rate on Inflation in Iraq During the Period (1970-2014)


Abstract The aims of this research are to determine the impact of financial depth and exchange rate on inflation rate in Iraq during the period (1970-2014). To test the Co-integration among the variables the Engle–Granger and Johansen and Juselius are used. Beside that, vector error correction model (VECM) is employed to determine the direction of the causality between financial depth and inflation, as well as between exchange rate and inflation in the short and long run. The analysis of the results shows that there is a co-integration among the variables,and the direction of the relationship is a directional move from financial depth to inflation, and from exchange rate to inflation in the short and long run. The study recommended that must control the money supply and find tools to absorb the broad money supply and create new channels to finance the government deficit, as well as, reconsidering of the policy of the exchange rate of the Iraqi dinar against US dollar, to achieve stable and reduced inflation rates.