Regional Geopolitical Shocks and Iraq’s Parallel Exchange Rate: Uncovering The Oil-Price Transmission Mechanism
DOI:
https://doi.org/10.56956/eyc7bm77Keywords:
geopolitical risk, parallel exchange rate, oil prices, foreign exchange market., ardlAbstract
The present study focuses on the connection between regional geopolitical changes and the parallel foreign-exchange market of Iraq and the possibility of international oil prices as a transmission channel. The data used is monthly data from January 2006 to December 2025 and it is for regional geopolitical risk (GPR), Brent crude oil prices, and the parallel IQD/USD exchange rate. An Autoregressive Distributed Lag (ARDL) modeling methodology is used to analyze relationships. The findings suggest that geopolitical risk affects the short-run depreciation pressure on the Iraqi dinar, and it has a statistically significant effect on the current depreciation pressure. This, however, is not a long-term relationship. The results of the ARDL bounds test also do not suggest a stable cointegration relationship between geopolitical risk and oil price as well as parallel exchange rate. Based on these findings, the link between international oil prices and the main transmission mechanism for region geopolitical shocks to Iraq's parallel exchange market has limited effects. Rather, the movements in exchange rates seem to be more dependent on domestic conditions, such as foreign-currency supply, the market's expectations, precautionary demand for U.S. dollars, and institutional arrangements concerning exchange rates. In general, the geopolitical risk influences Iraq's parallel exchange rate in the short term, thereby emphasizing the need to enhance the foreign exchange market's ability to withstand regional instability.
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