Measuring and Analysis the Relationship between the Internal Public Debt and the Exchange Rate in the Iraqi Economy for The Period 2004 – 2022

Abstract

The scholastic view of public religion differed, and this difference was on two extremes. All
economic schools agreed that public debt is a monetary liquidity that was unjustly deducted
from the income and output cycle as a result of the imbalance in the economic balance and the
departure from the conditions of balance between aggregate demand and aggregate supply.
Debt is a waste of financial resources allocated to productive accumulation. Except for the
Keynesian school, which considers public debt to be an addition to aggregate demand after the
decline in the role of the private sector in investment as a result of pessimistic expectations that
warn of signs of economic contraction. Public debt is linked to the exchange rate through the
interest rate channel, so that public debt causes competition for financial resources. This
competition results in an increase in the local interest rate, which results in an increase in
demand for the local currency with the aim of increasing investment, and the demand for the
local currency raises the price of the local currency. Which means that there is an indirect
relationship between public debt and the exchange rate, but this relationship may create damage
in the balance of payments in the near future. They assumed the existence of a long-term causal
relationship between internal public debt and the exchange rate. The main goal of this research
is to verify the economic relationship between the investigated variables, using the
cointegration model and the error term correction vector model to prove the research
hypothesis. And the Kranger model of causality between the variables. The research reached
the most prominent conclusion, which is that individual expectations for the internal public
debt after each annual deficit in the state’s general budget cause a decrease in the value of the
local currency due to the increase in demand for the dollar and the decrease in demand for the
dinar, which means that there is causality in one direction. From internal public debt to the
exchange rate, this is what was proven by the results of Kranger’s causality test.