The relationship of global oil prices with exchange rate, trade balance, and foreign reserves in Iraq: a frequency domain causality approach

Subject Areas : International Economics

Ahmad Ghazi Havas Ahamareh ¹ , Maryam Emamimibody ²

1 - M.D Student Department of Economics, Isf.C., Islamic Azad University, Isfahan, Iran, [e-mail]
2 - Department of Accounting, Shahi.C., Islamic Azad University, Shahinshahr, Iran, (Crossponding Authur), [e-mail]

Received: 2025-04-22 Accepted : 2025-07-27 Published : 2025-10-23

Keywords: Global Oil Prices, Exchange Rate, Trade Balance, Foreign Reserves, Frequency Domain JEL Classification: N32, O45, F23, E34,

Abstract :

The main objective of this study is to investigate the relationship between global oil prices and Iraq’s exchange rate, trade balance, and foreign reserves through a frequency domain analysis. Covering the period from 2008 to 2022, the research employs the Granger causality method within a Vector Autoregression (VAR) framework. After estimating the VAR model, Granger causality tests are applied to assess the direction of relationships among the variables. The results reveal that, in both the short and long term, there is a bidirectional relationship between global oil prices and Iraq’s exchange rate as well as foreign reserves, indicating that fluctuations in oil prices affect these indicators while, in turn, movements in the exchange rate and reserves also influence oil prices. By contrast, the relationship between oil prices and the trade balance is unidirectional, with changes in oil prices shaping Iraq’s trade balance but not vice versa. These findings suggest important policy implications: Iraqi policymakers should prioritize diversifying sources of foreign exchange, reducing oil dependency, strengthening foreign reserves, and maintaining exchange rate stability to enhance economic resilience. Furthermore, continuous monitoring of oil price fluctuations is essential to support informed trade and fiscal decisions.

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