Measuring the financial and monetary impact of public expenditure and money supply on inflation in Iraq

Abstract

The paper seeks to clarify and measure the relationship between public Expenditure and money supply in the broad sense(M2) as explanatory variables on inflation expressed in the overall price level (as a dependent variable) in the Iraqi economy during the period 2005-2019. We relied on the Autoregressive Distributed Lag(ARDL) model to measure the relationship between study variables, using annual data for descriptive analysis and monthly quarterly data for standard analysis. The time series were subject to static tests through the ADF (Augmented Dickey-Fuller) test and the PP (Phillips - Perron) test. We also applied the Integration Analyses for Common and Model Stability Tests (Breusch-Godfrey serial correlation LM test) to test the model for absence of serial correlation; the Wald test for the significance of the estimated variables; and the CUSUM and CUSUM Squares test for the stability of the model as well as the estimation of the model’s short- and long-term parameters. It turns out that there is a positive relationship between public expenditure, the general level of prices, the supply of money and the general level of prices. These variables have a role to play in raising the overall level of prices because of higher aggregate demand for aggregate supply and thus deepening the inflationary gap within the Iraqi economy.