The effectiveness of fiscal policy in the fight against inflation: The case of Iraq (2004-2024)

This study, which analyzes the role of fiscal policy in the fight against inflation on a cyclical and shock basis, makes important contributions to the literature. In this context, the study aims to analyze the effects of fiscal policy on inflation for Iraq based on monthly data for the period January 2004-June 2024. According to the long-run coefficient estimates using the FMOLS method, fiscal policy has variable effects under different types of shocks. Under positive shocks, an improvement in the budget balance reduces inflation to a limited extent, while an increase in public expenditures and money supply increases inflation. Under negative shocks, the effect of fiscal policy changes is generally stronger inflationary pressure. On the other hand, results from the Hatemi-J asymmetric causality test show that under positive shocks, there is a bidirectional causal relationship between inflation and government expenditures, government revenues, exchange rate and money supply. However, these effects are limited under negative shocks. This suggests that the effects of fiscal variables in economically and politically fragile countries like Iraq are significantly shaped by the nature of the shocks. In general, the study points out that the effects of fiscal policy on inflation are of a changing nature and therefore, many factors such as the direction of shocks and periodic conditions should be evaluated together. Accordingly, the effectiveness of fiscal policy does not only depend on the choice of instruments, but is also closely related to when and under what economic conditions these instruments are implemented.