Impact of Macroeconomic Variables on Iraq's Real Money Demand (2004–2023) by Using the Conditional Error Correction Model

Abstract

The study aims to analyze the trajectory of macroeconomic variables and their impact on the real money demand in Iraq over the period (2004–2023), utilizing modern econometric models, specifically the Conditional Error Correction Model (CEC). The study adopted an analytical inductive methodology for the data of macroeconomic variables, including real GDP, public expenditure, inflation, exchange rate, interest rates, and money velocity, converting annual data into quarterly data to ensure precision in economic measurement.
The results indicate that real GDP grew at a compound rate of 3.6%, contributing to a 5.8% increase in real money demand, positioning it as a key economic driver in Iraq. The estimated model shows a positive long-term response of money demand by 0.26%. Public expenditure rose at a 7.7% compound rate, with a short-term positive impact of 0.20% on money demand. Inflation had a negative short-term effect of -0.42%, while the exchange rate positively impacted by 0.71%. Money velocity declined from 4.3 to 1.8 times, reflecting increased money hoarding as a precautionary measure. Interest rates showed a weak, statistically insignificant effect of 0.02%. The model confirmed a long-term relationship between the variables and real money demand via the bounds test, with a high adjustment speed of 129%, indicating economic volatility and shocks faced by Iraq. Thus, enhancing non-oil real economic growth and improving public expenditure efficiency are essential to support sustainable money demand in Iraq.