Impact of Fiscal policy rules on the effectiveness of monetary policy in Iraq 1990-2015

Abstract

The study aims to find a relationship between fiscal discipline expressed by the rules of fiscal policy and the effectiveness of monetary policy expressed by supply of money, the exchange rate and inflation rate in Iraq for the period 1990-2015. The study started from the premise that, if the fiscal policy disordered will have a big impact on the effectiveness of monetary policy in Iraq, and through adopting the fiscal rules the monetary policy can remove or reduce the impact of the financial discipline, especially since Iraq depends mainly on oil revenues to cover general budget expenses, and will cause a shock to the economy and reflect this impact on the reduction of general revenues of the state and thus increase the budget deficit and the accumulation of public debt, which has a reciprocal effect relationship with variables of monetary policy . It was reached to accept that the research hypothesis of financial turmoil in Iraq has mainly impact on the effectiveness of monetary policy (money supply, exchange rate, inflation rate), for the period (1990-2015). Through a review for evolution of the variables of monetary policy (money supply, exchange rate, contagious inflation) during the study period (1990-2015), it was observed a positive and proportionality relationship with government spending, in the first half of schooling time the study marked increasing in the deficit, which was covered by release the new cash, which in turn led to an increase in money supply and exchange rate (devaluation of the dinar) and the average of inflation, the second half of the study time marked by higher government revenues associated with oil revenue which the government stimulated the increase in government spending, which in turn led to an increasing in money supply without the exchange rate because the ability of the Central Bank through auction of foreign currency to maintain the level of the exchange rate. The study recommended to adopt the fiscal rules to contribute and determine the maximum acceptable level of government spending by the ratio of GDP growth as a fiscal rule, for a prominent role to spending during the study time on the money supply and inflation. As well as treatment the structural imbalance in public spending items and items of general revenue and reduce dependence on oil revenues to cover current expenditure, and work to establish a sovereign fund to the accumulation of realized fiscal surpluses in the years of abundance to invest it in the development of financing sources of the public budget.