The Relationship of Global Oil Prices with Exchange Rate, Trade Balance, and Foreign Reserves in Iraq: A Frequency Domain Causality Approach.

ahmad ghazi havas ahamareh ¹ ( Department of Economic, Islamic Azad University, Isfahan(Khorasgan) Branch, Isfahan, Iran )
maryam emamimibody ² ( )

Submited date : 2025-04-22 Accepted date : 2025-07-27

Keywords: Global oil prices, exchange rate, trade balance, foreign reserves, and frequency domain.,

Abstract :

The main objective of this study is to examine the relationship between global oil prices and Iraq’s exchange rate, trade balance, and foreign reserves using a frequency domain analysis approach.This research is conducted over the period from 2008 to 2022, employing the Granger causality method within the framework of a Vector Autoregression (VAR) model. Initially, the VAR model is estimated to analyze the data, and then the Granger causality test is applied to assess and confirm the bidirectional relationships among global oil prices, the exchange rate, trade balance, and foreign reserves. The findings indicate that in both the short and long term, there is a bidirectional relationship between global oil prices and the exchange rate and foreign reserves. This means that fluctuations in oil prices affect these two economic indicators in Iraq, and, in turn, changes in these indicators also influence global oil prices. On the other hand, the relationship between oil prices and the trade balance is unidirectional, meaning that changes in oil prices impact Iraq’s trade balance, but not vice versa. Based on these findings, it is recommended that Iraqi policymakers prioritize the diversification of foreign exchange sources, reduce oil dependency, strengthen foreign reserves, and enhance economic stability by maintaining exchange rate stability. Continuous monitoring of oil price fluctuations is also essential for informed trade decisions.

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