Review and analysis of the operational mechanism of the foreign currency auction window as a monetary policy tool in Iraq

Abstract

The main objective of this study is to review the general meaning of the foreign currency sale window and related concepts, the mechanism by which the foreign currency sale window operated by the Central Bank of Iraq, and to analyze the trajectory of this window, both in terms of foreign currency sales and purchases, as well as the amount of foreign reserves and their impact on the foreign exchange rate and targeting inflationary pressures in Iraq. Due to the radical and multifaceted transformations and changes that the Iraqi economy underwent after 2003, and the opening up to the global economy after being isolated for a long period from the international economic, financial and monetary system, the foreign currency sale window was established according to the Central Bank Law No. 56 of 2004. Article 28 of this law stipulated simple and unconditional sales, which means making foreign currency more readily available in the parallel market in order to achieve monetary and price stability. This came as a result of meeting the increasing domestic demand for foreign currency from banks, financial institutions and money transfer companies on the one hand, and financing the foreign trade of the private sector and its needs for foreign currency on the other. Standard tests revealed a long-term equilibrium relationship between the model variables. However, the short-term relationship between foreign exchange window (WS) sales and the inflation rate was inverse, which is also reflected in Iraq's foreign exchange rate .