Asymmetric Exchange-Rate Pass-Through to Inflation in Iraq: Nonlinear ARDL Evidence from Three Monetary Regimes, 1990–2023
This paper examines whether depreciations and appreciations of the Iraqi dinar are transmitted to consumer-price inflation symmetrically or asymmetrically over the period 1990–2023, a sample that spans the sanctions-era hyperinflation (1990–2003), the post-reform stabilization (2003–2014), and the recent oil-shock and devaluation phase (2014–2023). Using the nonlinear autoregressive distributed lag (NARDL) framework of Shin, Yu, and Greenwood-Nimmo (2014), the nominal exchange rate is decomposed into cumulative positive (depreciation) and negative (appreciation) partial sums, allowing the long-run and short-run responses of inflation to differ by the direction of the shock. The bounds test confirms a long-run level relationship (F = 6.471, above the 5% upper critical bound), and the error-correction coefficient of −0.630 (p = 0.016) indicates that roughly 63% of any disequilibrium is eliminated within one year. Cumulative depreciations carry a statistically significant long-run coefficient (−0.140, p = 0.008), whereas cumulative appreciations are statistically indistinguishable from zero; a Wald test rejects long-run symmetry decisively (t = −4.064, p = 0.0005), while short-run symmetry cannot be rejected (F = 1.151, p = 0.335). The counter-intuitive sign of the depreciation coefficient is shown to be regime-conditioned: the structural break separating the hyperinflationary 1990s from the post-2003 stabilization dominates the full-sample average, a reading corroborated by CUSUM-of-squares instability and residual heteroskedasticity. The results imply that symmetric pass-through models misrepresent Iraqi inflation dynamics and that the Central Bank of Iraq should calibrate its response to the direction, and not merely the size, of exchange-rate movements.