The impact of the reciprocal relationship of the general budget and the net trade balance on inflation in the Iraqi economy using the (SVAR) model for the period (2004-2020)

Abstract

The aim of the research is to understant the nature of the reciprocal relationship that exists in Iraq between the public budget and the trade balance. This understanding can be attained by monitoring their impacts on overall supply and demand as well as how these variables are mirrored in the inflation phenomenon. Along with measuring and analyzing the causal relationship's direction, the research also examines the impact of Iraq's general budget deficit and trade balance on the country's overall level of prices from 2004 to 2020.The annual data was used from its official sources. The study assumed that the deficit in the Iraqi economy is a double deficit and it is directed from the trade balance towards the public budget, causing inflation, due to the nominal financial wealth that we possess, since the economy is rentier. The study used the analytical descriptive approach in the theoretical side as well as the quantitative approach in the applied side with the use of the structural autoregressive vector (SVAR) model. The study concluded that there is a causal relationship between the net public budget and the net trade balance. The impact of net shocks on inflation from the public budget is relatively weak.. As for the net trade balance variable, its contribution to changes in the inflation rate was large as a result of the weakness of the local productive sectors and the heavy dependence on imports from abroad to meet local demand.