MONETARY POLICY, INFLATION, AND BANKING ACTIVITY IN IRAQ: EVIDENCE FROM PANEL ARDL ANALYSIS

Abstract

This research examines the influence of monetary policy on inflation control and its subsequent impact on banking operations in Iraq over the period 2015–2024. Inflation represents a major macroeconomic challenge for the Iraqi economy, undermining price stability, diminishing purchasing power, and impeding the efficiency of financial intermediation. The study explores the relationships between the principal instruments of the Central Bank of Iraq’s monetary policy, namely, Money Supply (MS), Interest Rate (IR), and Exchange Rate (EX), and Inflation Rates (INF), while concurrently assessing the repercussions of these relationships on the performance of commercial banks. The analysis utilises a robust quantitative approach based on the Panel Autoregressive Distributed Lag (ARDL) methodology, drawing on official datasets from the Central Bank of Iraq and the annual reports of four selected commercial banks: Bank of Baghdad, Trade Bank of Iraq, Iraqi Investment Bank, and Middle East Bank. Methodological procedures include descriptive statistics, the Augmented Dickey–Fuller (ADF) unit root test, Pearson correlation analysis, and multiple linear regression. The findings indicate a statistically significant positive association between money supply and banking activity, whereas inflation and interest rates display significant negative impacts on bank performance. Fluctuations in the exchange rate demonstrate a weak and statistically non-significant influence. These results highlight the necessity of enhancing coordination between monetary and fiscal policies, managing money supply prudently, and advancing banking instruments to strengthen financial stability within Iraq.