The Trend of Public Spending and its Impact on Some Macroeconomic Variables in Iraq

Abstract

The research investigates the trend of containing the impact of external economic shocks on some of the financial variables in countries exporting primary commodities, especially oil — and Iraq is selected as the sample in this research. The purpose of this research is to predict the role of fiscal policy in the context of the impact of external economic shocks on macroeconomic variables. The research adopts the standard methodology of the Vector Error Correction Model test to find the co-integration of the public spending model. The results of the study reveal that a shock in public spending leads to an increase in money supply, inflation and aggregate consumption. The conclusion indicates that there is an equilibrium relationship between the variables of the model (money supply, inflation rate, total consumption, the dummy variable, and government spending). The research’s main recommendation include the diversification of the base of the Iraqi economy and create an economy characterized by a gradual increase in the contribution to other economic sectors. This contributes to the formation of the gross domestic product and the diversification of the structure of public revenues. It also prepares for the change of the Iraqi economy from the rentier economy into the market economy. The aim of the research is to reach findings that prevent the Iraqi economy and the public budget from sudden fluctuations in oil revenues.