The Effectiveness of Interest Rates on Monetary Policy in Iraq for The Period (2003-2023)

The interest rate plays a significant role in economic activity and is considered one of the most important indicators used to analyze the movement or direction of the macroeconomy. It is used as a tool to influence economic activity through monetary policy. Economic theory often assumes that the interest rate affects an individual consumer's decision to allocate their income between current consumption and savings. It is also assumed that the interest rate influences an individual's decisions regarding the components of their financial asset portfolio in general. For example, it influences the decision to choose between purchasing real estate, holding bonds, or keeping a savings deposit in a bank. According to economic theory, the interest rate also affects the volume of investment. Furthermore, the interest rate is considered one of the intermediate or operational tools of monetary policy, and sometimes it is the ultimate goal of monetary policy. The path of monetary policy in implementing and achieving this ultimate goal passes through the channel of the interest rate as an operational objective. The interest rate, which was administratively set in Iraq before 2003 and until early 2004, is now floating or freely determined by market forces. At that time, the monetary authority used interest rates as a direct monetary tool to curb monetary and financial imbalances in the economy. The interest rate structure was characterized by prevailing rigidity and a failure to account for the continuous rise in the general price level. This rendered the banking system ineffective in attracting domestic savings due to the emergence of negative real interest rates. However, after the Central Bank was granted independence in managing its monetary policy tools to achieve its objectives under its new law, and after interest rates were freely determined by market forces, interest rates became one of the intermediate or operational tools of monetary policy. The path of monetary policy in implementing and achieving its ultimate goal now passes through the interest rate as an intermediate objective.