The impact of the net general budget on the exchange rates (official and parallel) in Iraq for the period (1990-2024) using the threshold model
Abstract
This research shows the role of the net public budget in shaping the official and parallel exchange rates in Iraq from 1990 to 2024. It employs a threshold regression model that allows the budget effects to differ across regimes. The linear correlation between the budget and the two exchange rates is small, while the nonlinear correlation is considerably larger, which explains the choice of the threshold regression model. The Bai and Perron search algorithm finds two significant thresholds for each market, which are -1,372,342 and 44,022 for the official exchange rate, and -173,783 and 44,022 for the parallel exchange rate. The models are well-specified and satisfy tests of normality, autocorrelation, and heteroskedasticity. In the official exchange rate equation, the budget coefficient is positive and significant in the deep and moderate deficit regimes, while it becomes negative in the high surplus regimes.
For the parallel rate, the coefficient is large and positive in deep deficits, negative in the middle regime, and negative again in high surplus, as expected to ease market pressure as fiscal conditions tighten. These results suggest that exchange rate responses are asymmetric and regime-dependent, with larger and quicker responses in the parallel market. Policy should focus on budget settings that achieve outcomes above the 44,022 threshold if possible, develop buffers to stabilize oil revenue fluctuations, and eschew money financing of deficits that would boost prices and foreign currency demand The findings offer practical advice on budget execution coordination with foreign exchange management and tracking regime changes that signal increased pressure in the parallel market.
Downloads
References
1- Abbas, S. N. (2008). The effect of inflation on the equilibrium exchange rate of the Iraqi dinar (1990–2005): An applied study. Journal of Baghdad College of Economic Sciences University, 17.
2- Alakkari, K., Ali, B., Abotaleb, M., Abttan, R. A., & Dutta, P. K. (2024). advanced machine learning approaches for enhanced GDP nowcasting in Syria through comprehensive analysis of regularization techniques. Mesopotamian Journal of Big Data, 2024, 102-117.
3- Ali, B., Alakkari, K., Abotaleb, M., Mijwil, M. M., & Dhoska, K. (2024). MLP and RBF algorithms in finance: predicting and classifying stock prices amidst economic policy uncertainty. Mesopotamian Journal of Big Data, 2024, 48-67.
4- Apergis, N. (1998). Budget deficits and exchange rates: Further evidence from cointegration and causality tests. Journal of Economic Studies, 25(3), 161–178. https://doi.org/10.1108/01443589810215324
5- Babiker, S. A. D. (2014). Determinants of the exchange rate using cointegration and error-correction models (Master’s thesis, Sudan University of Science and Technology).
6- Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18(1), 1–22. https://doi.org/10.1002/jae.659
7- Beck, S. E. (1994). The effect of budget deficits on exchange rates: Evidence from five industrialized countries. Journal of Economics and Business, 46(5).
8- Caner, M., & Hansen, B. E. (2004). Instrumental variable estimation of a threshold model. Econometric Theory, 20(5), 813–843. https://doi.org/10.1017/S0266466604205011
9- Darag, L. D. J. S. (2024). THE IMPACT OF THE GENERAL BUDGET ON THE EXCHANGE RATE IN IRAQ. American Journal of Research in Humanities and Social Sciences, 22.
10- Eldepcy, M. A. (2022). The budget deficit financing impact on the real exchange rate in Egypt (1975-2020). International Journal of Economics and Finance, 14(3), 1-84.
11- Eldepcy, M. A. (2022). The budget deficit financing impact on the real exchange rate in Egypt (1975–2020). International Journal of Economics and Finance, 14(3).
12- Feizi, R., Ahmadzadeh, K., & Javaheri, B. (2022). The Impact of Exchange Rate Fluctuations and the Oil Price Shocks on Government Budget: CGE Model Approach. Iranian Economic Review, 26(2), 343-368.
13- Gidey, H. T., & Nuru, N. Y. (2022). The effects of government spending shocks on real exchange rate in Ethiopia. Journal of Economic and Administrative Sciences, 38(4), 544-561.
14- Hakim, H. T. A. (2024). The Impact of the Financial Budget on Exchange Rate Risk the Impact of the Financial Budget on Exchange Rate Risk. Journal of Ecohumanism, 3(8), 11937-11954.
15- Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345–368. https://doi.org/10.1016/S0304-4076(99)00025-1
16- Hansen, B. E. (2000). Sample splitting and threshold estimation. Econometrica, 68(3), 575–603. https://doi.org/10.1111/1468-0262.00124
17- Ibrahim, M. I., & Al-Jabri, Q. A. F. (2023). Measuring the effect of the federal budget deficit on the exchange rate in Iraq using the autoregressive distributed lag (ARDL) model (2004–2021). Unpublished manuscript.
18- Kara, O. (2011, June 2–4). The U.S. budget deficit, inflation, and exchange rate. Paper presented at the Annual Conference of the Pennsylvania Economic Association.
19- Mansour, Y., Ismail, R., & Alakkari, K. M. (2020). Using Mixed Data Sampling (MIDAS) To Study The Impact Exchange Rate Volatility On Consumer Prices In Syria During The Period 2011-2019. Latakia University Journal-Economic and Legal Sciences Series, 42(1).
20- Marouf, H. (2005). Macroeconomic analysis. Dar Al-Safa Publishing.
21- Mekkaoui, H., & Boubaker, M. (2020). The effect of the public budget deficit on the exchange rate in Algeria: An econometric study using the ARDL model (2003–2018). Journal of Strategy and Development, 10(5, Special Issue), October.
22- Miyamoto, W., Nguyen, T. L., & Sheremirov, V. (2019). The effects of government spending on real exchange rates: Evidence from military spending panel data. Journal of International Economics, 116, 144-157.
23- Morsi, M. G. (2017). Evaluating monetary policy in achieving exchange rate stability. The Scientific Economic Journal, Sohag University.
24- Tong, H. (1990). Non-linear Time Series: A Dynamical System Approach. Oxford University Press.
25- Wali, S. A., & Kazem, I. A. (2020). The effect of exchange rate fluctuations on Iraq’s general budget: A case study (2004–2018). Unpublished manuscript.
Published
Deprecated: Return type of Carbon\Traits\Date::createFromTimestamp($timestamp, $tz = null) should either be compatible with DateTime::createFromTimestamp(int|float $timestamp): static, or the #[\ReturnTypeWillChange] attribute should be used to temporarily suppress the notice in /home/iqserver/journals/kjeas.uowasit.edu.iq/lib/pkp/lib/vendor/nesbot/carbon/src/Carbon/Traits/Timestamp.php on line 29
2026-07-09
