A.M. GHUSSON TALFAN MADLOOL

AlFarahidi University

College of Administration & Economics

GhossonTalfan@Gmail.com

009647707954041

A.M. Amenah Muayad Abdullah

AlFarahidi University

College of Administration & Economics

amnamoayed9052@gmail.com

0096 7711953660

Abstract

Monetary policy is an essential part of the general economic policy, as monetary policy seeks to achieve many economic goals through quantitative and qualitative tools to maintain stability and monetary balance, and its importance increased with the beginning of the twentieth century due to the increase and complexity of monetary and economic problems, Represented in the rise in the general price level , as it is considered one of the most important macroeconomic indicators around which the process of formulating monetary policies revolves for the welfare of consumers.

The study relied on the use of descriptive and analytical methods in analyzing the data as well as statistical method by using the program (SPSS) to find the effect between the independent and dependent variables during the period (2010-2018), the study also aims to identify the role of monetary policy in facing inflationary conditions, this policy is issued by the Central Bank, the most important of which is the legal reserve, the discount price, and open market operations through the three sections, which consist of general concepts about monetary policy tools and inflation. As for the practical section data for all variables was analyzed. Statistically, these results were proven to be identical to the economic theory.

Hence, the importance of monetary policy in solving economic problems has increased, given the multiplicity of effects that monetary policy leaves in various economic fields and aspects, including the impact on the performance of commercial banks by determining the amount of cash reserves in order to guarantee the rights of depositors and the safe use of funds and avoid risks, as well as open market operations which has an active role in curbing the increasing rates of inflation, as well as the discount price and its active role in controlling inflation therefore, the application of monetary policy tools is a preoccupation for banking departments, as banks can lose their customers as a result of the irrational and rational use of available financial resources, which is reflected Negatively on the levels of profits achieved and the financial position of the banking sector in particular and the overall economy in general, and this in turn affects the levels of inflation and limit the increase of its rates.

Keywords: monetary policy, discount price, monetary reserve, open market operations, inflation

تحليل وتقدير بعض أدوات السياسة النقدية على معدلات التضخم

  في العراق للمدة (2010-2018)

م . م . غصون تلفان مدلول

كلية الأدارة والأقتصاد / جامعة الفراهيدي

م . م . آمنة مؤيد عبد الله

 كلية الأدارة والأقتصاد / جامعة الفراهيدي

الملخص :

      تعد السياسة النقدية جزءاً مهماً من السياسة الاقتصادية العامة، إذ تسعى السياسة النقدية إلى تحقيق أهداف اقتصادية عديدة عن طريق الأدوات الكمية والنوعية للمحافظة على الاستقرار والتوازن النقدي، وقد ازدادت أهميتها مع بداية القرن العشرين بسبب تزايد المشكلات النقدية والاقتصادية وتعقدها ومن اهم المشاكل الأقتصادية مشكلة التضخم والتي تتمثل في ارتفاع المستوى العام للأسعار حيث يعتبر من أهم المؤشرات الكلية الأقتصادية التي تتمحور حولها عملية صياغة السياسات النقدية من أجل رفاهية المستهلكين .

       أعتمدت الدراسة على أستخدام الأسلوب الوصفي والتحليلي في تحليل البيانات وكذلك الأسلوب الأحصائي من خلال أستخدام برنامج ( spss ) في أيجاد الأثر بين المتغيرات المستقلة والتابعة خلال المدة ( 2010-2018 ) .كما تهدف الدراسة على التعرف على دور السياسة النقدية في مواجهة الظروف التضخمية وهذه السياسة صادرة من البنك المركزي وأهمها الأحتياطي القانوني وسعر الخصم وعمليات السوق المفتوحة . من خلال المباحث الثلاثة والتي تتكونة من المفاهيم العامة حول أدوات السياسة النقدية  والتضخم أما المبحث العملي تمت فيه تحليل البيانات لجميع المتغيرات أحصائياً وتم الأثبات لهذه النتائج بأنها مطابقة للنظرية الأقتصادية .

       ومن هنا ازدادت أهمية السياسة النقدية  في حل المشكلات الاقتصادية، ونظراً لتعدد الآثار التي تتركها السياسة النقدية في المجالات والنواحي الاقتصادية المختلفة ومنها التأثير على أداء المصارف التجارية عن طريق تحديد مقدار الأحتياطي النقدي  بهدف ضمان حقوق المودعين والاستخدام الآمن للأموال وتجنب المخاطر، فضلاً عن عمليات السوق المفتوحة والتي لها دور فاعل في كبح جماح تزايد نسب التضخم ، وكذلك سعر الخصم ودوره الفاعل في السيطرة على التضخم .لذلك تعتبر تطبيق أدوات السياسة النقدية هي الشغل الشاغل للإدارات المصرفية ، فقد تخسر المصارف زبائنها نتيجة الاستخدام غير الرشيد والعقلاني للموارد المالية المتاحة، مما ينعكس سلباً على مستويات الأرباح المتحققة والمركز المالي للقطاع المصرفي على الخصوص والأقتصاد الكلي على العموم وهذا بدوره يؤثر على مستويات

التضخم والحد من زيادة نسبه .

الكلمات المفتاحية : سياسة نقدية ، سعر الخصم ، الأحتياطي النقدي ، عمليات السوق المفتوحة ، التضخم .

Research Problem:

What is the reality of monetary policy and how effective it is in reducing inflation rates? To answer this fundamental question, we must first answer the following sub-questions:

– How effective is monetary policy in achieving economic stability and curbing inflation?

– What is the reality of monetary policy in Iraq and what are the reforms witnessed by this policy?

– Do monetary instruments (open market operations, legal reserve, “discount” policy price) affect reducing inflation?

Research Importance:

  1. The research derives its importance from the fact that it tries to deal with monetary policy tools and targeted inflation as indicators of economic activity and the possibility of monetary policy relies on them in directing its policies aiming to achieve the goal of price stability.
  2. Knowledge of the monetary policy tools that are most effective in stimulating the overall economy, where the experiences of developing and developed countries have proven that the possibility of measuring monetary policy, and therefore the existing output gap on the one hand, and linking it to the monetary sector through the inflation targeting mechanism, represents a contemporary approach on one hand, and influences the construction of monetary policy on the other.

Research Goals: 

  1. This study attempts to expose the hypotheses on which monetary policy is based to testing in the light of experience and quantitative analysis and focuses in particular on inflation-targeting policies that have been adopted worldwide.
  2. The experience concludes that targeting inflation may be consistent with the results of intervention in open market operations, the discount price, as well as the monetary reserve.

Search Limits:

  1. The spatial limits of the research: are represented by the Iraqi economy (the Central Bank and Commercial Banks).
  2. The time limits of the research: It covers the period (2010-2018).

Research hypothesis:

Monetary policy has a significant impact on reducing inflation through its indirect tools:

– Discount price.

– Open Market operations.

– Legal reserve.

The research stems from a hypothesis that the existence of a direct or inverse moral correlation with statistically significant among monetary policy tools to reduce inflation during the period (2010- 2018).

The First Topic

The concept of monetary policy, its importance and tools

The concept:

Monetary policy is one of the most important economic policies, which plays an essential role in economic activity as it is one of the most fundamental functions of the central bank. Kent defined monetary policy as: “managing the expansion and reduction of the money supply to achieve a specific goal (Al-Quraishi, 2016: 16), so if the monetary authority wants to increase aggregate demand to achieve a high level of employment and wages, then it should increase the money supply (expansionary monetary policy), and vice versa if it wants to reduce aggregate demand, it follows a policy of shrinking the money supply ie, deflationary policy. It is also defined as “all measures taken by monetary authorities to make deliberately influence upon the nature and volume of funds to achieve the objectives of monetary policy by controlling the availability, cost and use of funds and credit (R.Cauvery and others, 2009: 234), That is, all actions taken by the Central Bank by using its tools to bring about the required change in the activity. Likewise, it is also defined as “a group of monetary and banking regulations that have an influential role in controlling the amount of cash available in the economic system. In this sense, it includes all procedures that have been taken by a government, Central Bank and treasury intending to influence the amount of cash in terms of its provision, use, and credit (Al-Dulaimi, 1990: 54).

Monetary policy is a set of decisions and actions taken by the monetary authority to influence money and credit and deliberately regulate public liquidity to reach the final goals, it is the decisions issued by the Central Bank, which is the authority responsible for drawing and implementing monetary policy by using quantitative and qualitative monetary policy tools to influence monetary variables like “the exchange rate, interest rate and money supply” in a deliberate conduct to reach the final goals.

 The Importance of Monetary Policy (Youssef, 2014, 22):

  1. The effectiveness of monetary policy is conditional on the financial depth and institutional status of the financial sector, as well as the real economy’s structure in its production base and flexibility regarded the supply of goods and services.
  2. The productivity, costs, and the variation in their growth between the concerned country and the world, as the different characteristics of non-internationally traded goods and services compared to the traded goods sector, all the above are affecting the behaviour of the real exchange rate and thus the international competitiveness, the status of the current account of the balance of payment.
  3. Reading it objectively in harmony with the rules of the empirical approach, there is no doubt that the interpretation of inflation after determining the factors governing the movement of the general level of prices was one of the essential axes of the book’s research to consider the potential role of monetary variables and the extent of the impact of monetary policy tools on liquidity and the latter on stability.
  4. The concept of stability itself is brought up for discussion in light of the practical value of the current definition of this concept, amid the fundamental issues in the international financial relations of Iraq after 2003 is how to look at the reserves of the central bank in an oil economy, its possible function and its necessary size.

Monetary Policy Objectives

Monetary policy aims to achieve a set of final goals, and the monetary policy strategy begins to achieve its goals by defining the monetary tools to be used to influence the primary targets, and then influence the intermediate goals to reach the final goals drawn by the monetary authority. Among the most prominent final aims:

  1. Achieving stability in prices: The technical authority seeks to control the general level of prices and prevent the occurrence of inflation or deflation, where violent and continuous changes in prices affect economic activity, so any change in price levels towards an increase in the case of inflation, for example, will lead to a decrease in the value of money and then a decrease in purchasing power, which results in harmful effects on the level of income, wealth and resource allocation, increases investment risks and limits economic growth. (Abdul Hamid, 2013: 92).
  2. Stability of exchange rates: The goal of stabilizing exchange rates is regarded as a goal linked to the first goal, which is the stability of internal prices, (Al-Douri, 2013: 188). Monetary policy can control exchange rates at the desired level through many measures, including increasing or decreasing interest rates in light of the free movement of capital because the rise in domestic interest rates compared to the outside world leads to the flow of capital into the country, which leads to an increase in demand on the local currency and the rise in its exchange rate and vice versa, the exchange rate is also affected by changes in the money supply, an increase in the money supply leads to a decrease in the value of the local currency, a decrease in its exchange rate against foreign currencies, and an increase in the number of paid units of the local currency in exchange for one unit of the foreign currency, and vice versa in the event of a decrease in the money supply (Shilmon, 2015: 5).

The monetary authority may resort to direct intervention to influence exchange rates through purchases and sales of the local currency with foreign currency, and this procedure guarantees that there will be no change in the local interest rates, thus that there will be no change in the investment inside the country.

  1. Contribute to achieving external balance: i.e. achieving balance in the balance of payments so that it works in the interest of the state, since all countries, regardless of their degree of economic development, seek to make the balance of payments work in their interest, the deficit in the balance of payments means that the country pays foreign currencies abroad more than it receives, and this entails negative effects on the value of the currency in case of surplus, (Al-Dulaimi, 1990: 87).

Monetary policy contributes to reducing or fixing the deficit in the balance of payments, through the Central bank by raising the rediscount rate, for example, in the framework of following a contractionary monetary policy, and then raising the interest rate, this leads to attracts capital flows looking for profits, thus it works to reduce the severity of the deficit in the balance of payments, likewise, raising the interest rate leads to reduce the volume of credit and domestic demand for goods and services, then reducing the general level of prices in the country, while the decline in the prices of local commodities encourages the state’s exports and reduces the individual’s demand for the purchase of imported commodities, meaning that reducing the amount of money by the monetary authority can contribute to reducing the deficit in the Balance of Payments, (Abdul Hamid, 2013: 101).

  1. Contribute to Achieve Full Employment: It means that the monetary authority seeks to raise the level of economic activity by raising the rates of using natural and human resources, which is one of the most fundamental final goals that monetary policy seeks to achieve, noting that the natural rate of unemployment ranges between 3-5 (Abdul Qader, 2010: 196).
  2. Participation in achieving a high growth rate: The goal of economic growth is linked to the aim of achieving full employment, where economic growth alone is capable of absorbing the surplus from the labour component, and the task of monetary policy here is to influence interest rates as one of the determinants of investment, as reducing interest rates raises investment rates and activates the economy by doubling investment, which enables the economy to reach the starting stage that Put the economy on the path of rapid growth, (Abdul Hamid, 2013: 22).
  3. Stability of interest rates: The continuous fluctuations in interest rates generate a state of uncertainty in the economy, which makes it difficult for individuals and institutions to commit to future contracts, or to determine their size or term, which prompts the central bank to make the goal of stabilizing interest rates one of the most important goals that He seeks to achieve it (Basha, 176, 1985).

Tools Policy Monetary

The monetary authority seeks to achieve its goals through a set of tools, which are divided into:

– Quantitative control tools.

– Quality control tools.

First. Quantitative control tools:

It is also called indirect tools and seeks to influence the size and quantity of means of payment, by influencing the liquidity owned by commercial banks or interest rates:

  1. Bank Rate Policy or Discount Rate: It is the interest rate that the central bank charges from commercial banks in exchange for rediscount security it owns, or in return for what the Central Bank provides in terms of loans and advances to commercial banks, secured by commercial and financial papers in the possession of banks (Shendi,2010: 154) When using the policy of changing the rediscount rate as a tool to change the money supply, some issues limit its effectiveness. In certain cases, some banks may want to borrow from the central bank and consider it the last resort for borrowing (Abdul Muttalib, 2013: 27 ), Likewise, the change in the discount rate does not affect the volume of bank credit except in the case of the availability of a wide and regular discount market (financial market) in which dealing in financial and commercial papers is spread, this is more available in developed countries than it is in developing countries, and also the high discount rate in some These cases do not lead to a decrease in the demand for loans, especially if expectations are optimistic about an increase in demand and an increase in profits (Al-Janabi, 2017: 271).

If the country allows the free movement of capital, then the change in the discount rate will also have an impact on the flow of capital when the discount rate is raised all interest rates in the market will rise, and the increase in interest rates on deposits leads to attracting short-term foreign capital to benefit from high interest rates, especially if the movement of capital is highly sensitive to changes in interest rates (H. Lahuja).

  1. Open Market Operations: It is one of the most fundamental tools of monetary policy in many countries, especially the developed ones, open market operations are represented in their narrow sense by the central bank buying and selling government bonds, but in their broad sense means buying and selling securities, gold and foreign currencies in addition to buying and selling government bonds, (Al-Samarra’i, 2013: 204), the central bank through buying and selling operations aims to influence economic activity by influencing bank reserves and thus their ability to grant credit, which affects the money supply, and the other effect interest rates, when the central bank enters as a buyer of securities, this leads to an increase in the reserves of banks and thus an increase in their ability to lend and a decrease in interest rates. Open market operations also cause a change in the prices of securities, and the entry of the central bank as a buyer of bonds leads to an increase in their prices and a decrease in the return on them.

The effectiveness of open market operations depends on the availability of basic conditions(Hathlool, 2010: 18):

  1. The availability of an active technical market for trading these securities.
  2. The extent to which commercial banks respond to the desires of central banks.
  3. The existence of developed financial markets dealing in securities and the availability of government bonds (quantity and quality).

The open market policy, in cooperation with the discount rate policy, is used to control the movement of capital. If the monetary authority follows a deflationary monetary policy by raising the discount rate, which leads to an increase in the interest rate, and since this procedure involves encouraging effects for the movement of foreign capital looking for profits, its entry into the country will feed the cash reserves of commercial banks, which will lead to an increase in the volume of means of payment (Al-Dulaimi, 1990: 60).

To achieve its goals, the monetary authority can use the open market policy to support the discount rate, so it is transferred to the money market as a seller of securities that will lead to the absorption of liquidity, as the decline in the prices of emerging securities will give an incentive to banks to use their liquidity to buy securities and prefer them over credit because of the return of these securities, thus the simultaneous use of the two tools leads to achieving a state of stability in prices and balance in the balance of payments (Al-Samarra’i, 2013: 201).

  1. Statutory reserve ratio (mandatory): It can be defined as the percentage imposed by the central banks on each deposit entered into the commercial banks, and the expression in this percentage leads to a change in the money supply through the change of the monetary multiplier, when this ratio increases, the value of the cash multiplier decreases, and the volume of deposits that can be granted decreases, and then the money supply decreases (Shendi, 2010: 167 ).

The money Supply Multiplier- The Legal Reserve Rate:

The direct aim of imposing this percentage is to keep deposits with the Central Bank to ensure the safety of depositors’ money, it is also used to lend to banks that are exposed to financial crises or lack of liquidity to maintain their financial position soundly, also, its main objective is to influence the money supply of commercial banks ( 

Hathlool, 2010:188).

The effectiveness of the policy or the legal reserve ratio depends on (Taurus, 2011:200):

  1. No cash leakage.
  2. The an absence of other methods for commercial banks to obtain monetary resources outside the framework of the central bank.
  3. The extent of the response and flexibility of the productive sectors to those changes applied by the monetary authorities.

The Central Bank can use this ratio to influence the reserves of commercial banks resulting from the movement of foreign capital into the country, rising this ratio leads to freezing a larger amount of reserves obtained by banks from abroad, hence, it limits its ability to grant credit, and vice versa, in the event of an outward migration of capital, here the central bank can compensate it by reducing the reserve ratio, because this helps banks to return their funds employed abroad and avoid imbalance in the balance of payments. (Al-Janabi,2014, 276).

The Second Topic

Inflation, The Concept, Types and Implications

The Concept of Inflation:

Inflation can be defined: (as the continuous rise in the general level of prices). It is also known as (a lot of money chasing few commodities), meaning that the average growth rate of money income is greater than the average growth rate of production (Al-Dawsky, et al., 2011: 98-99).

There is another concept of inflation based on the quantity theory of money, it is every increase in the amount of money in circulation leads to a rise in the general level of prices, and this definition requires that the increase in the amount of money in circulation is the reason for the occurrence of inflationary phenomena (Hatat, 2006: 28). It is also known as the reduction of purchasing power of consumers, thus the continuous decline in the real income of these people (Sharaf, Abu Araj, 1994: 105). It is also defined by the French economist James as the increasing demand for commodities compared to supply potential, which results in a continuous rise in prices and an increasing decrease in national resources of foreign currencies (Akkawi, 2009: 17 ). Briefly, inflation defines as a monetary phenomenon characterized by a continuous and escalating rise in the general level of goods and services prices over a relatively long period.

Inflation is characterized by several characteristics, the most important of which are:

  1. The price increase is inclusive of all or most of the goods and services.
  2. The price rise includes all regions of the same country and is not limited to some without others.
  3. The wave of rising prices continues for a relatively long period and is not short-term seasonal.
  4. The inability of money to fully perform its basic functions in the economy.
  5. Inflation expresses a state of imbalance in economic activity represented by the instability of price levels (Al-Tahir, Al-Khaleel, 2004: 130).

Inflation’s Types:

There are several types of inflation, these are separate from each other and may be based on the conditions of the inflation, its origin, its shape, or its severity, as follows:

First. According to the state’s intervention in setting prices:

  1. Apparent or open inflation: It means inflation in which prices, wages and other expenses rise freely without the state’s intervention in determining the price level.
  2. Repressed inflation: It is a hidden one under which prices rise or extend due to economic factors not being allowed to operate freely because of the existence of direct government restrictions that are set to control the prices, such as compulsory pricing, the card system or appointment (Akkawi, 2009: 18).

Second. In terms of the severity of inflation: 

Unbridled inflation: It is an enormous increase in prices followed by an increase in wages, which increases its term production costs and decreases the profitability of businessmen, which 

  1. necessitates a new rise in prices.
  2. Creeping inflation: it is part of the rise in prices resulting from the increase in wages at a rate higher than the increase in production, and it is a slow and moderate gradual inflation associated with the natural forces of economic growth, but its continuity and the accumulation of its effects can lead to the occurrence of unbridled inflation (Al-Wadi, and others, 2009: 186 – 187).

Third. According to the source of inflation:

  1. Domestic inflation: It is inflation that occurs as a result of internal economic or political factors, i.e. related to the conditions of local markets or economic politics, or as a result of having a structure within the economic activity (Al-Taher, Al-Khaleel, 2004: 134).
  2. Imported inflation: It is inflation that results from the relationship between foreign trade and economic activity, especially when the ratio of imports to the volume of economic activity is high such inflation appears now in many developing countries as they seek to achieve the goal of economic and social development (Al-Taher, Al-Khalil: 135).

Fourth. According to economic sectors:

  1. Commodity inflation: It is the type of inflation that occurs in the production of consumer goods, which leads to the prevalence of estimated profits in consumer goods production industries.
  2. Capital inflation: It is the inflation that occurs in the production of investment goods, which leads to the prevalence of estimated profits in the industries producing investment goods (Akkawi, 2009: 18-19).

Inflation measurement:

To measure the change in the general level of prices, several measures can be applied, that are statistically called numbers index, the most important of which are:

The implicit deflator of gross domestic product (Deflator GDP):

It is a standard number used to measure the rate of change in the prices of all goods and services included in the calculation of the gross domestic product. Therefore, it is considered a general measure of inflation rates per year.

It is calculated in the following way:

2.Consumer price indexز

          For this purpose, the consumer price index is used, and it be calculated in the following ways, the most important of which are:

a. The simple index: It is the ratio of the total prices of consumer goods and services in the current year compared to their prices in a previous year, It is called the base year according to the following equation:

b.Weighted index: It is calculated by dividing the total weighted prices of consumer goods and services in the current year by the total weighted prices of the same goods and services in the base year according to the following equation:

  1. Consumer price index:In calculating this number, the total consumption expenditure is used at the prices of the current year, it is called the nominal consumption, and it is divided by the consumption expenditure itself divided by the prices of the base year, which is called the real consumption according to the following equation: (Al-Essa, Kataf, 2006: 258-262).

 

 

The economic and social effects of inflation:

  1. Economic Effects:
  2. Inflation affects the redistribution of real income: when price levels rise, there will be a decrease in the purchasing power of individuals whose cash incomes have not changed or whose cash incomes have increased by less than the rate of price levels, such as retired individuals or those with limited income (Al-Ameen, Pasha, 1983: 200 ).
  3. Inflation affects the balance of payments: Inflation hurts the balance of payments, as the country that suffers from high inflation finds its products in a weak competitive position compared to the products of other countries with a lower price, and thus its imports increase and its exports decrease, which leads to a deficit in the trade balance compared to the balance of payments, or at least the surplus size decreases, (Al-Wadi, and others, 2009: 188).
  4. Inflation affects indebtedness: the debtor benefits from inflation, while the creditor is damaged, because the debtor borrows an amount of money and returns it at a later period at a lower real value, due to the continuous rise in prices (Al-Wadi and others, 2009: 188).
  5. Inflation affects economic growth: From a purely theoretical point of view, the owners of the first opinion see that monetary inflation has a positive effect on the levels of economic growth, through its positive impact on savings and investment rates, on the levels of the economy as a whole, then will lead to an increase in economic growth rates (Al-Samhouri, 2012: 456-457).
  6. Social effects of inflation:
  7. The effect of inflation on social differentiation: Most specialists agree that sharp inflationary waves if they continue for continuous periods, lead to substantial social changes in the class structure, which in turn leads to significant changes in relative positions and social classes and may be associated with shifts in power relations between the different groups and segments of society.
  8. The deterioration of the value of productive work: As a result of the massive inflationary wave that swept all the countries of the Third World, there was a severe disturbance in the system of values, consumption patterns, and ways of life, and this resulted in an increasing waste of the social value of (productive work), this means that there is no longer a relative relationship between the increase in the level of income and the increase in the level of labour productivity.
  9. The spread of bribery: We find that those with fixed and limited incomes resort to this method to compensate for the deterioration that occurred in their social and living conditions in the field of bribery for example, we find that the employee in the government operates according the authority entrusted to him by providing a legitimate service to individuals in return for a price, or he affords an illegal service in return for a certain return (Sharaf, Abu Araj, 1994: 118-116).

Appropriate policies to counter inflation:

  1. Monetary policy: The government, through the monetary authority, uses monetary tools through which it can restrict the amount of money in circulation to absorb cash liquidity from the hands of members of society, consequently the demand for goods and services declines, as a result of the decrease in purchasing power and then the reduction in prices, and among these policies are raising the legal reserve ratio in commercial banks and raising the rate of rediscounting commercial papers, raising the interest rate on loans and the entry of the central bank into the stock market as a seller of public debt bonds, and the sum of these monetary measures is called the contractionary monetary policy, because according to it, aggregate demand will shrink to a level that is commensurate with the proper supply of goods and services (Al-Tahir, et al., 2004: 146).
  2. Fiscal Policy: Fiscal policy means the sets of procedures, methods and rules adopted by the government to manage its financial activity as efficiently as possible to achieve a set of economic, social and political goals during a certain period, and there are important measures adopted by the state to execute fiscal policy in combating inflation, and among these measures are:
  3. Public spending control policy.
  4. Tax control policy.
  5. Public debt control policy (public loans).
  6. Other supportive policies.
  7. The policy of direct control of wages: The fiscal and monetary policy requires its application if inflation results from the growth in demand by reducing spending rates, while the solution for inflation resulting from the increase in costs will be direct control over wages because it represents the most substantial element in increasing costs.
  8. Price control policy: You may prefer the price control policy over the wage control policy, this is because it requires direct intervention by the government to control the successive heights in prices inevitably leading to a demand for an increase in wages to keep pace with the standard of living that prevails in society (Al-Hadithi, 2011: 28-30).

The Third Topic

The development of monetary policy tools in Iraq and their role within the limits of the phenomenon of inflation, Analysis of the development of monetary policy tools:

Monetary policy in Iraq witnessed many developments in the field of monetary policy and its tools, especially the changes that occurred in the legal monetary reserve, the discount rate, and open market operations as a result of changes in revenue volatility levels and political events.

Noting Table No. (1), these changes will be clear to us:

Table (1) Monetary Policy Tools

Years Monetary Reserve% Annual Rate of Change Open Market Operations Annual Rate of Change Discount Price% Annual Inflation Rate
2010 7155 (24.01) 42320 6.41 6.25 2.5
2011 7814 9.21 46563 10.03 6 5.6
2012 8624 10.37 56724 21.82 6 5.6
2013 9626 11.62 62067 9.42 6 1.9
2014 10576 9.87 61452 (0.99) 6 2.2
2015 9390 (11.21) 52721 (14.21) 6 1.4
2016 8707 (7.27) 39893 (24.33) 4.33 0.5
2017 6505 (25.29) 50219 25.88 4 0.2
2018 10409 60.015 56088 11.68 4 0.4

Source: Column data (3),(4),(6), (7), Central Bank of Iraq Annual Statistical Bulletin Directorate General of Statistics and Research for the period (2010-2018).

Column data (3) & (5) were calculated by the researcher.

The numbers in brackets ( ) mean their sign is negative.

First: The Evolution of the Legal Monetary Reserve:

The legal monetary reserve is the measure by which central banks oblige commercial banks to keep a certain percentage of their deposits to protect depositors from the risks of bankruptcy and crises, which affects the ability of commercial banks to create credit (Kana’an, 2012: 268).

There is an annual adjustment to the legal reserve ratio of commercial banks at the central bank to control the effects of inflation (Hudgins & Rose, 2005: 371). If we go back to Table (1), we will notice the gradual increase in the monetary reserve in registration years. In the research where the year (2014) had recorded the highest percentage of reserves which amounted to (10576), this led to an inflation rise reaching the rate(2.2). Then inflation decreased in the subsequent years with complete clarity of the fluctuation of inflation during the period under discussion, While in the year (2017), the reserve ratio reached its lowest level, reaching (6505), so the decline in inflation seems clear as a result of increasing the legal reserve ratio.

We also note that during the period (2014-2017), which is the period that ISIS entered Iraqi lands and occupied some of its provinces, at that time the army and the Popular Mobilization Forces were preoccupied with fighting ISIS to expel it by force, and for that purpose, huge funds were spent during this period to fund military armament from one hand and to fund the expenses of American military operations for the same purpose from the other. All these expenses led to a decrease in the budget’s monetary revenues during the mentioned years, as well as the decline in global oil prices, which led to a reduction in the legal cash reserve and a clear imbalance in the budget.

This is evident in Figure (1) from right to left, which shows a clear decline in years (2014- 2017):

Source: The researcher’s work based on the data of Table (1)

Second. Evolution and analysis of the discount price for the period (2010-2018):

As we have shown in the first topic, the relationship of the discount price in the stock market transactions between commercial banks, so if we note the period under discussion, we will find that there is clear stability in the rates of the discount price, especially in the first years under discussion, That is, in the years (2010-2015), the stability of the discount rate rates reached (6%), while for the years (2016-2018), the discount rate decreased to (4%), and this appears clearly in Figure (2).

Figure (2) Trend charting of general predictive values for the evolution of the re-discount price:

Source: The researcher’s work based on the data of Table (1)

Third. The development of open market operations:

The Central Bank’s initiative to buy or sell government bonds in the short and long terms can be described as an intended credit policy, where in normal circumstances, the Central Bank’s sale of securities aims to reduce credit,while its purchase aims to expand credit:

(https://unstats.un.org/sdgs/indicators/Globa).

Figure (3) charts the overall trend predictive values of open market operations:

Source: The researcher’s work based on the data of Table (1)

Estimating and Analyzing the Relationship Between Open Market Operations and Inflation:

The focus of the research has lied on the effect of open market operations, which is a tool of monetary policy as an independent variable, as well it affects inflation as a dependent variable in the Iraqi economy, where the main focus is on analyzing the relationship between open market operations and inflation in the Iraqi economy, the first stage includes: the description of the functional relationship and standard models that open market operations enjoy, inflation, and estimated model tests, while the second stage includes: estimating and analyzing the results, then the third stage includes: analyzing the results of the relationship and estimated models (Al-Hadithi, 2011: 130).

  1. The Stage of Describing the Functional Relationships, Standard Models and Testing Them:
  2. Description and formulation of the model:To measure the relationship between public spending and inflation (econometrics) must be applied, so the functional relationship between public expenditure and inflation can be described as the relationship between one variable or several variables.

Describing the model means identifying the independent and dependent variables, the prior theoretical prediction of the value and sign of the parameters as well, this stage is regarded as one of the most significant stages because it depends on the experience and skill of the economist and this by turn enables him to gain economic knowledge, During this process, the economist uses economic theory to find the functional relationship between two variables to put it into the model, to achieve this end, he makes several hypotheses about the variables, depending on putting the relationship in a mathematical formula and estimating the model in the double logarithmic mode.

                   Logy = Logx

Where: Y= inflation

              X= Open Market Operations

  1. Estimated Model Tests: After estimating parameters’ values, they must evaluate along with the test of the estimate’s accuracy by using recognized statistical tools and methods. It is noteworthy that the model estimation method depends mainly on economic, statistical and standard tests. The passing of the model for these tests means that most or all the assumptions of the regression model are available, then, the desired characteristics and estimations will achieve because when the estimators are sound, the economic and statistical tests will be the same, because these tests depend in their evaluation on the values and variance of the correct estimates, so the model will accept as the best chosen models after testing it (Al-Zubaidi, Al-Fatlawi, 2011: 29-30).

     The global economic standard estimates must base on the achievement of three criteria, namely:

  • The economic criterion: Those are the facts, postulates, basic principles and laws that the theory reached when studying economic phenomena and variables, which are reflected in a standard way on the value and indication of estimations, if the estimated parameters are contrary to what the theory decides, we refuse them unless, there is a logical justification that leads to accepting their validity and rejecting what the theory decides, but if it is consistent with the logic of the economic theory, then these estimates will be accepted.
  • Statistical standard (first class tests): they are statistical standards for what must achieve from statistical conditions that enable us to confess of what has be estimated statistically, and it includes the first main statistical hypotheses of the method of least squares and its testing, the most important of which are the coefficient of determination, the modified coefficient of determination, and the significant tests (T-test) and (F-test).
  • Standard criterion (second-order tests): Statistical standards include a set of preliminary tests for basic least squares estimates, which is a set of assumptions and tests for the coefficient of determination (R22), the standard error of estimation, and (F), (t)tests and other basic tests.In this case, these capabilities can be used in Analysis and inference and a statistical prediction, that is, the realization of the initial assumptions of the ordinary least squares (Al-Sifu, and others, 2006: 59-60).
  1. Analyzing the results of the relationship between open market operations and inflation: After describing and estimating the relationship between (omo) and inflation, it has been found that there has been a considerable and successive increase in open market operations’ growth reflected in the degrees of liquidity, The model estimated through the dependent variable validated the hypothesis that (omo) is directly proportional to inflation, so the analysis corresponds to the logic of the economic theory (Al-Hadithi, 2011: 136).
  2. The stage of presenting and analyzing the results of the economic model: The focus on activating open market operations has a mutual effect on liquidity by opening the doors of loans and deposits, that the increase in liquidity leads to a direct impact on the increase in employee salaries, with an increase in purchasing power, which increases the inflation of the Iraqi economy, through The following estimated mode:

Estimating the relationship between inflation and open market operations, where:

Y= inflation

X1= time

X2= (omo)

A= fixed limit

Y= A+X1– X2

Y= 1195.94+ 3.061X1– 0.593X2

R2= 0.76=

F= 4.458

76%

F= 4.458

After analyzing the relationship between the independent and dependent variables, the following results have been reached:

The estimated model shows that the independent variable in the model was significant over the dependent variable, and it showed that 76% of the variables occur in inflation as a result of the change in R2, which is the coefficient for determining open market operations and time, while 24% of them are due to other factors that have not included in the model but have included in the random variable.

The calculated value of f= (458.4) indicates that the overall significance of the model is estimated from a statistical point of view the negative sign indicates a positive relationship with the model as well. During the period (2010-2018), open market operations increased with increasing time have led to decreased inflation.

The direct relationship is shown in Figure No. (4) that open market operations have a direct relationship with time due to the evident increase, according to the data in Table No. (1).

Figure (4):Trend line and predictive values of open market operations over time:

Source: The researcher’s work based on the analysis of the data of Table No. (1).

  Estimating the relationship between discount prices and inflation:

Discount price have regressive effects on inflation rates, this was observed through the estimated model using the statistical program, as the inverse relationship between discount rates, inflation appeared when the discount rate have increased by the central bank, this leads to a decrease in the monetary supply, which leads in turn to an inflation decline that this seems evident, in Figure (4).

The significance of the equation refers to the correlation’s strength between the discount price and time, as they represent variables independent (X1,X2), and dependent variable (y) is inflation, where:

X1= time

X2 = discount price

Y= inflation

A= fixed limit

Y= A+ X1– X2  estimated equation

Y= 701.4+ 0.348 X1– 0.852 X2

R2 = 0.75= 75%

F= 18.480

          According to the data of Table No. (3) the program (SPSS) has used to analyze and estimate the relationship between the variables, and used the program  (OLS) to estimate the equation due to the simplicity of this model and the accuracy of the estimate,while estimated model shows that the independent variable in the model was significant over the dependent variable, in time where R2 in the determination coefficient indicated that (75%), of the variables occur in inflation as a result of the change in the discount price and time, and that (25%) of them were due to other factors that were not included in the model, so that is include within the concept of a random variable.

          The calculated (f) value indicates (480.18), and it expresses the overall significance of the model estimated from a statistical point of view, while the negative sign indicates the inverse relationship, where ,with the passage of time inflation decreases as a result of the decrease in the discount price, which is granted within the powers of the monetary policy issued by the Central Bank of Iraq.

                   This inverse relationship is illustrated by Figure (5), i.e. inflation on the one hand, and time and discount rate on the other:

Figure No. (5): General trend line and predictive value of inflation over time

Source: The researcher’s work based on the analysis of the data of Table No. (1)

Conclusions and recommendations:

Conclusions:

  1. The practical part, has been shown to estimate the relationship between the monetary policy tools such as (the discount rate and inflation), and there is an inverse relationship, which is evident in Figure No. (1) and for the period (2010-2018).
  2. The relationship between inflation and open market operations has been estimated, and there is a high direct and significant relationship and a strong correlation of 76%, as shown in Figure (2) for the period (2010-2018).
  3. The monetary authority has set specific goals to build a solid base which it have directed towards economic stability, the Central Bank, after obtaining its independence, and through its monetary policy, has achieved a set of goals that helped him to have an evident imprint on the Iraqi economic reality, some of these goals are: achieving a low level of inflation, raising the value of the Iraqi currency after its deterioration, and stabilizing the Iraqi dinar exchange rate, as well as using other tools such as treasury transfers, and permissions, as well as moving towards the stability of interest rates, and the use of indirect instruments to achieve these goals.
  4. The policy of the monetary authority in targeting inflation has lost the competitiveness of local commodities to confront foreign ones, due to their low prices and the lack of internal support for local commodities, legally and financially, which led to the disruption of the real sector.
  5. The survival of Iraq as an importer of all goods and services leads to the incidence of extra crises, including unemployment and other social problems, so work must be done to build a solid economic base in addition to the tendency to reduce imports and maintain international reserves.

Recommendations:

  1. The need to work to limit the expansion of government operational expenditure, increase the money supply, create a rise in inflation level, and focus on investment expenditure to build a sound production base.
  2. Increasing monetary initiatives are undertaken by the Central Bank, such as the one-and-a-half trillion Iraqi dinars initiative, monitoring and directing them towards the right economic sectors.
  3. Building a solid and consistent economic base (agricultural, industrial, commercial) to rebuild the real sector and be supported by the Central Bank because it is considered the only one that succeeded in achieving its objectives during the study period.
  4. Work to coordinate (monetary and fiscal policies), to achieve efficiency in the Iraqi economy, because the work of the monetary authority lies in reducing inflation rates and achieving price stability must be accompanied by support from the financial authority to increase investments to raise the level of economic growth.
  5. Developing studies and researches that support and develop monetary policy, as well as moving towards an increase economic growth and reduce inflation.

References:

First. Books:

  1. Pasha Zakaria Abdel-Hamid, Money and Banking with an Islamic Perspective, Collage of Commerce, Kuwait University, 1985
  2. Al-Janabi, HielAjamiJamil, Money, Banking and Technical Theory, 2nd edition, Dar Wael, Amman, 2014.
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  4. Al-Douri, Zakaria Al-Douri and Yusri Al-Samarrai, Central Banks and Policies Cash, 1st edition, Dar Al-Yazuri, Amman, 2013.
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  10. Abdul-Muttalib Abdul-Hamid, The Economics of Money and Banking, 1st Edition, University House, Egypt, 2013.
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  1. Shalomon, NaglaChamoun, Analysis of the Factors Determining Trends in the Iraqi Dinar Exchange Rate against the US dollar for the period 2004-2015 Journal of Critical Studies and Finance, Volume 1, Number 2, 2017.
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  3. Al-Dosky, Azad Ahmed Saadoun, Al-Waeli Samir FakhriNema, and others. The impact of fiscal and monetary policies on inflation in the Iraqi economy for the period from mid-2003-2010, an econometric analysis, Issue 23, Volume (7), University of Tikrit, 2011.
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  6. Al-Sumaidaie Hussein Khalid, The Mutual Effects between Monetary and Fiscal Policies and the Possibility of Coordination between Them to Achieve Stability in Prices (Iraq, a Case Study), Master Thesis, University of Baghdad, College of Administration and Economics, 2016.
  7. Akkawi, Omar Mahmoud, The Effectiveness of Monetary Policy in Controlling Inflationary Pressures in Iraq for the Period (1980-2009), Master Thesis, College of Administration and Economics, University of Baghdad, 2009.
  8. Hathat, Said, an economic and econometric study of the phenomenon of inflation in Algeria, a letter Master, Faculty of Law and Economic Sciences, KasdiMerbah University, Waraqah, Algeria, 2006.
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  11. UN Global Indicators Framework for the Goals and Targets of the 2030 Agenda for Sustainable Development, 2019:

https://unstats.un.org/sdgs/indicators/Globa

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