THE DOLLAR CHANNEL OF INTERNATIONAL MONETARY POLICY TRANSMISSION-AN EXPANDED MACRO-EMPIRICAL STUDY AND STRUCTURAL ANALYSIS OF THE IRAQI ECONOMY (2020–2026)

Abstract

This study evaluates the macroeconomic mechanisms governing the cross-border transmission of United States monetary policy shocks via the global "Dollar Channel," focusing specifically on small, open, resource-dependent developing frameworks through an empirical examination of Iraq. Operating under a quasi-fixed exchange rate peg, Iraq exhibits substantial structural vulnerabilities stemming from near-total fiscal dependency on USD-denominated hydrocarbon revenues and persistent import reliance. The empirical dynamics between Federal Reserve policy cycles (monetary easing versus aggressive tightening) and domestic macroeconomic indicators—such as the official-to-parallel exchange rate spread, sovereign foreign exchange reserves, and core inflation—are examined using comprehensive macro-data covering the 2020–2026 period. The findings indicate that maintaining a nominal exchange rate anchor does not fully insulate the domestic market from external financial shocks. Instead, global dollar fluctuations, combined with international compliance frictions and regulatory vetting protocols introduced by the Federal Reserve and international monitoring authorities, drive parallel market segmentation, induce imported inflation via the Dominant Currency Paradigm, and force asymmetric real adjustments in domestic liquidity. To mitigate these structural vulnerabilities, the study outlines strategic policy measures, including foreign reserve basket diversification, bilateral trade clearing mechanisms, and structural financial deepening.