Demand for foreign currency External balance and exchange rate | ||
| Iraqi Journal For Economic Sciences | ||
| Article 1, Volume 0, Issue 43, September 2017, Pages 67-114 | ||
| Author | ||
| Dr. Ahmed Ali Ibrahi | ||
| Abstract | ||
| The paper attempts to explore the functioning of foreign exchange market in an oil dominated economy with a pegged exchange rate as a nominal anchor. Some mainstream theoretical models and empirical findings are presented to understand the Iraqi arrangements and policy, through an international perspective. Also, the paper addressed the essential components of foreign exchange operations of the central bank, highlighting the interconnections between the government budget and the central bank balance sheet. The accounting and behavioral aspects of the private sector demand for foreign exchange are carefully considered in terms of international reserve , monetary base, and money supply. Furthermore, the research work deals with the real appreciation of the Iraqi dinar and its economic consequences. In this regard, bilateral real exchange rates of the Iraqi dinar with the major currencies are computed for the years 1988-2003. Furthermore, positive co-movement of oil price and real exchange rate of Iraqi dinar and correlations with real exchange rates of other currencies are investigated. Considering the crude oil price sharp decline and huge budget deficit, due to limited non-oil source of finance, public debt monetization will be constrained by the international reserve of the central bank, the fact that this paper confirms. The need for institutional changes in the budgeting and regulatory set of the financial sector has become very clear as a necessity for fiscal sustainability and foreign exchange market stability. | ||
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