Investigating the impact of monetary policy instability on economic growth in Iraq.

Abstract

Sustainable economic growth is one of the fundamental goals of macroeconomic policymaking in developing countries, and achieving it requires the implementation of stable and efficient monetary policies. Due to its heavy dependence on oil revenues, macroeconomic fluctuations, and instability in monetary policies, the Iraqi economy has faced numerous challenges in achieving sustainable economic growth over the past decades. Therefore, the main objective of this study is to examine the impact of monetary policy instability on economic growth in Iraq. For this purpose, the monetary policy instability index has been extracted using liquidity growth fluctuations and the generalized conditional variance heterogeneity (GARCH) model. The data used include annual time series of the Iraqi economy during the period 1975 to 2024, which have been collected from reputable international databases, especially the World Bank. In order to examine the short-term and long-term relationships between the research variables, the autoregressive distributed lag (ARDL) model was used. Before estimating the model, unit root and cointegration tests were conducted, the results of which confirmed the existence of a long-term relationship between the model variables. Also, the results of diagnostic tests and coefficient stability tests (CUSUM and CUSUMSQ) show that the estimated model has appropriate validity and stability. The empirical findings of the study show that monetary policy instability has a negative and significant effect on Iraq's economic growth in the short and long term. This result indicates that increasing monetary uncertainty limits economic growth by reducing investment, disrupting economic decision-making, and weakening productive activities. Also, the results show that gross fixed capital formation and labor force have a positive and significant effect on economic growth in the long term, while natural resource rents do not have a significant effect on Iraq's economic growth. Accordingly, reducing monetary policy instability, enhancing the credibility and independence of the central bank, and adopting stable and predictable monetary policies can play an important role in strengthening sustainable economic growth in Iraq. The findings of this study can provide a suitable basis for designing and implementing monetary policies to promote macroeconomic stability and economic growth in Iraq.