Macroeconomic Impacts of Oil Price Shocks: Evidence from Iraq by Using Vector Autoregressive Model

Abstract

Based on a VAR framework, Granger Causality Tests, Impulse Response Function and Variance Decomposition analysis on the annual data from 1970 to 2021, This study aims to demonstrate the effect of oil price fluctuations on GDP, imports, international reserves, and exports in Iraq. The Granger causality results demonstrated a unidirectional connection moving from oil price to imports, exports, international reserves, and GDP, this is an inevitable result because oil prices are determined in the international markets according to specific factors that do not include local economic variables. The variance decomposition result indicated that oil price changes are an important source of variation in the studied variables. Finally, the results of the impulse response function indicated that fluctuations in oil prices significantly impact GDP, exports, imports, and international reserves in Iraq. Therefore, we suggest that economic policymakers work seriously to develop practical plans to diversify the Iraqi economy instead of relying too heavily on oil revenues, which are characterized by sharp and continuous volatility, to avoid the negative effects of these fluctuations on the main macroeconomic variables in Iraq.