The Role of the Foreign Currency Sales Window in Achieving Monetary Stability in Iraq

Abstract

This research aims to study the impact of managing the foreign currency auction window on monetary stability in Iraq, focusing on the relationship between the Central Bank of Iraq and its sales of US dollars or other foreign currencies, exchange rates, banking liquidity, and foreign exchange reserves. The study is econometric in nature, employing daily and monthly secondary data for the period 2010-2025 from the Central Bank of Iraq, the Ministry of Finance, and other official reports. A standard linear regression model was used to analyze the effect of the volume of sales through the Central Bank's auction window on the exchange rate, with liquidity and foreign exchange reserves included as covariates. Correlation tests, dynamic regression, and time-sequence analysis were also applied to gain a precise understanding of the dynamics of the Iraqi money market. The results showed that selling foreign currency through the Central Bank's auction window significantly reduces exchange rate volatility and enhances monetary stability, particularly when adequate levels of banking liquidity and foreign exchange reserves are available. The study also demonstrated a positive relationship between foreign exchange reserves and market volatility control, highlighting the central bank's pivotal role in managing economic shocks. The results also indicate that effective monetary intervention policies can help reduce inflation and currency volatility, and maintain macroeconomic stability.